Hello, and welcome to the Insight Enterprises Second Quarter 2024 Operating Results. My name is Kiki. And I'll be your call operator today. During the presentation, you will have the opportunity to ask a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I will now hand you over to your host, James Morgado, Senior Vice President, Finance and CFO of Insight 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 ended June 30th, 2024. 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 this 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, August 1st, 2024. 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 be referring to non-GAAP financial measures, as we discuss the second quarter 2024 financial results. When discussing non-GAAP measures, we would 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 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 for joining us today. In Q2, we delivered double-digit cloud and core services gross profit growth and expanded gross margin and adjusted EBITDA margin despite a choppy demand environment. Our strategy to focus on solutions for our clients, including cloud, services, and the fastest-growing areas of the market has delivered improved economics to our shareholders. In addition, the profitability initiatives and the operating expense actions we have taken over the past several quarters have strengthened our foundation and improved resilience of our business. All of these elements are critical to our strategy to become the leading solutions integrator. We have also continued to invest in sales and technical resources as well as new growth areas, such as Gen AI solutions, which will be critical as demand improves. Here are a few highlights from Q2. Gross profit grew 5% to $453 million. Gross margin expanded by 260 basis points to 21%. Cloud gross profit increased 21% to $139 million. Insight core services gross profit increased 12% to $81 million. Additionally, adjusted EBITDA margin expanded by 60 basis points to 6.5%, a Q2 record. And adjusted EBITDA increased 3% to $141 million. We achieved these results despite an uncertain macro environment and lower-than-expected demand, especially in our product business. We also had higher interest expense related to acquisitions, resulting in a decline in adjusted diluted EPS of 4% in the quarter. Overall, the variability and seasonality of our business is changing as we focus on selling more services and cloud-centric solutions and as the industry shifts towards consumption-based models. Our first-half results are more indicative of our execution and the progress we are making towards our solutions and a greater ambition. Year-to-date through Q2, compared to the prior year period, gross…

Thank you, Joyce. In Q2, net revenue was $2.2 billion, a decrease of 8% in U.S. dollars and also in constant currency. The decrease was driven by hardware, particularly infrastructure, and on-prem software partially offset by an increase in cloud and inside core services. In Q2, devices were flat, and infrastructure was down double digits year to year. Sequentially, devices increased modestly and infrastructure declined slightly. We continue to anticipate a modest second half improvement in devices, and we started to see green shoots in infrastructure demand in July and expect continued improvement throughout the year. Gross profit increased 5%, reflecting strong cloud and inside core services growth, partially offset by hardware decline. Gross margin was 21%, an increase of 260 basis points, and reflects a higher mix of cloud and inside core services. In addition, our profitability and pricing initiatives also contributed to higher hardware and services gross margin. Inside core services gross profit was $81 million, an increase of 12%, and reflects benefit of our acquisition. Cloud gross profit was $139 million, an increase of 21%, reflecting higher growth in infrastructure as a service and SAP. Adjusted SG&A grew 6%, primarily due to acquisitions. Organic adjusted SG&A is down year-to-year based on the operating actions we took last year, as we continue to prudently manage spending in the current environment. This resulted in adjusted EBITDA margin expanding 60 basis points to 6.5%, and adjusted diluted earnings per share were $2.46, down 4% in U.S. dollars and also in constant currency. The decline was due to an increase in interest expense from higher debt primarily related to the recent acquisition. Our most recent acquisitions were structured to include earnouts to share additional value with the sellers in the case of exceptional performance. These earnouts were measured at fair value…

Thanks, Glynis. In the first half of the year, we delivered positive results in many areas of the business. Cloud and Insight Core Services gross profit grew double-digits. We saw slight improvements in device demand. Gross margin expanded, reflecting a favorable mix of Cloud and Insight Core Services and benefits from our pricing and profitability initiatives. And we remain disciplined with SG&A management, all of which resulted in strong adjusted EBITDA margin performance. We are focused on integrating and driving revenue synergies with our recent acquisitions as they expand our expertise and capabilities across various geos and increase our relevance to our clients. While demand in our end markets remains choppy, we have made structural improvements and are focused on capturing profitable growth as demand returns. 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 journey. And 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]. The first question is from Joseph Cardoso from JPMorgan. The line is now open. Please go ahead.

Good morning, and thanks for the question here. So, first one for me is just on the full year earnings guide. Quite impressive that you're reiterating here despite what appears to be kind of a tougher operating environment, but I was hoping you can just dive into what's driving your conviction and reiterating at this point, particularly now that the guide implies a much steeper back half of the year. Like, what are you seeing as the key drivers in kind of that back half ramp here? And then I have a follow-up. Thank you.

Sure. Okay. Thanks, Joe. Good question. So, here's what I would say. In the second half of this year, we're going to have the benefit of a couple of things. One, we have the InfoCenter acquisition that's going to help us from an overall services gross margin, gross profit and gross margin perspective. Two, we have a SADA in the second half of the year. We had talked in Q1 about trying to smooth the SADA business so that we'd have less seasonality across quarters. That did not work out as we had anticipated in Q2. So, SADA remains very back-end loaded. It was dilutive in the first half of the year, and it will be accretive. We expect it to be accretive in the second half of the year, and that is reflected in the guidance that we have. We also expect that cloud will continue to be strong. That has been a core tenet for us. We believe that services is going to continue to be strong, helped by the acquisitions, as well as our organic business. And we are starting to see some green shoots in devices for sure, in terms of our sequential growth on year-over-year, starting to see some year over year improvements, up single digits on a year-to-day basis. And we're also starting to see some green shoots in infrastructure. As we go through to Q4, the infrastructure comp becomes significantly easier for us, ultimately. And we've had the benefit in our results to date, and we think we will continue to have the benefit in our results associated with the SG&A actions that we've taken over the past several months, starting in 2023. We're looking at the acquisitions that we've made, and looking to do some consolidations of some functions, where they can benefit from infrastructure we already have in place here at Insight. And we think that with that continued SG&A control, that will also help us in the second half of the year. And we are going to be buying back $165 million worth of our stocks in the second half of the year.

Got it. That's very clear. -- Yeah, so maybe we can just touch on the cloud gross profit growth, like moderated the last two quarters in a row in terms of the total growth, underperforming a bit from what you outlined in the beginning of the year. And it sounds like some of this is being driven by the SADA underperformance a bit. Maybe you can just dive into that more. Like, what are you seeing there that is different from your expectations earlier than the year, even 90 days ago? And maybe just touch on some -- it sounded like you referenced some actions you're trying to take or planning to take to kind of return that performance back onto trajectory. Maybe you can just dive into both those vectors. Thank you. Thanks for the questions.

Sure. So, thanks, Joe. So, CloudGP grew double-digits, as you know. We remain very confident in our organic cloud business. So, in addition to Microsoft and Google, we also have a lot of other publishers in there, Cisco, Adobe, Citrus, et cetera. In the quarter, network-related cloud offerings were more challenged than we expected in the quarter. So, anyway, that was a bit of a drag on the overall sort of traditional cloud, public cloud business that you were thinking of. And then we do expect, as Glynis mentioned, significant revenue synergies with SADA. And we expect improvement in SADA overall performance, which will help contribute to improved cloud performance in this. So, we feel pretty good about our cloud business. But, yeah, you're right. It was a little bit lighter than we expected in the quarter.

I think, Joe, I’ll just maybe add on to that is that, a couple of years ago, Microsoft was the behemoth in cloud. They dominated the cloud fees that we received. Now, it turns out that some of the other partners, Citrix, Cisco, Adobe, etcetera, are also becoming bigger players in overall cloud. Some of all those are still less than Microsoft combined, but they're still actually larger and some of those underperformed in Q2.

Thanks for all the colors, Joyce and Glynis. Appreciate it.

Thank you. The next question is from Matt Sheerin from Stifel. The line is now open. Please go ahead.

Yes, thank you. Good morning, everyone. Just another question regarding your guidance for the year, particularly top line. And I appreciate that you don't give top line guidance, but sort of backing into that based on gross profit and OPEX, it looks like you're going to have to grow pretty significantly in the second half. As you said, comps are going to get easier in Q4. But are you expecting the overall revenue to be up for the year? And is that going to be driven primarily by hardware?

We do expect that revenue will be up for the year. It's not going to be driven primarily by hardware. It's going to be driven by services and -- well, sorry, probably something about GPs. Let me rephrase my thinking. Hardware GP will grow in the year. Not hugely. Low, low single-digits. Hardware will grow. We will have some growth in services revenue and we will have more so the GP contribution from services on the cloud. We don't focus on the revenue side of the equation as much as we do on the GP side.

Okay. Thank you. And just looking at the North America results, your software sales were down pretty significantly sequentially in year-over-year. I know you commented on-prem software sales were weak, but could you give us more color? Was some of that netted down? And how should we think about that? Because I know that's a core part of your business?

So it's on-prem software and on-prem software for us is not netted down. It is recorded growth with COGS and then ultimately GP. And in any given quarter, there are large deals that happen or there could be large deals or multiple medium-sized deals that happen in the quarter that trigger that growth that we saw in Q1 versus what we're seeing in Q2, but there's nothing unique or different about Q2.

I would also add to that, Matt. If you look at it for the half, we feel pretty confident in the numbers that we're seeing. If you remember last quarter, we had a pretty big software deal that impacted us. And we talked about that on the revenue line, not so much on the GP line, but overall on-prem software for the half is exactly what we expected it to be.

Got it. So some of that was regarding relative to that big deal. Okay. And then so do you expect that segment to grow in the second half then year-over-year? Because the comps are going to get tough?

I don't know that that's necessary.

My question is just on growth.

Just on growth. Revenue growth. Matt, that segment is lumpy only because it depends on projects. The software that we sell in each particular quarter, we would envision that there would be some growth there, consistent to what we've had for the half year.

Okay. And then regarding your international sales and media, that was also down. One of your competitors was commenting about incremental weakness in the UK, and I know you have decent exposure there. So, are you seeing any of that in Europe?

I think that our UK business in particular did very well. We didn't see the same dynamics. We had Amdaris, which helped them, of course, but organically, that business also did well from a revenue, GP, and EFO perspective.

Okay.

Okay. Thank you. So your question, I guess, for the future, as of right now, we didn't see weakness in the UK in particular, in Q2, and we're not envisioning that for the rest of the year.

Okay. Thank you.

Thank you. The next question is from Adam Tindle from Raymond James. The line is now open. Please go ahead.

Okay. Thanks. Good morning. Glynis, I just wanted to maybe take a step back and talk about the guidance. Previously, you were talking about mid to high teen’s growth in gross profit dollars for the year. Today, with the update, we're talking about low double-digit growth in gross profit dollars for the year. Could you maybe unpack the buckets that drove that adjustment down? And I think really getting to the heart of the question, with SADA, we had previously been told this was about a $200 million of annualized gross profit dollars when you initially acquired it, I believe. Correct me if I'm wrong. How would you update that now on your SADA assumption for fiscal ‘24?

Okay. I think the number that you're quoting may be SADA's full year 2022 number, potentially. Okay. Here's what I would say. There is a portion of underperformance associated with SADA that is impacting our overall gross margin growth. We still believe that SADA has been a strategically valuable acquisition and will continue to be a strategically valuable acquisition in terms of our multi-cloud capability. SADA underperformed our expectations in the first half, but we expected were going to be diluted in the first half of the year and that they were going to be accreted in the second half of the year. We had some plans with regard to trying to smooth out that seasonality, but those did not come to fruition. So, SADA has remained very back and loaded. And as you remember, it's very back and loaded to Q4. That is still the case going forward. We have reduced our expectations with regard to SADA for the remainder of this year, albeit still back and loaded. And that is reflected in the guidance that we have provided. To date, we have grown GP at a slower rate than we had envisioned, but we have increased our gross margin more significantly than we had also envisioned. Hence, while we're bringing down our gross profit growth, we're increasing the gross margin associated with that from 19, which we said originally, to the 19% to 20% range.

And we also have changed our expectations. We went through our guide because we've also changed our expectations on SG&A since. So, I think originally we thought SG&A was going to grow faster than gross profit, and now it is growing more slowly than gross profit. And a big part of that is because we've right-sized the OPEX associated with SADA given the lower expectations.

Yeah, that makes sense. I guess you were very prescriptive on the SADA contribution prior to this quarter. I think you started at $0.55 to $0.75 of EPS. Last quarter, you updated to $0.55 to $0.65 of EPS. So, it sounded like you had a very detailed thinking on SADA for the year. I guess maybe under that framework, could you give us an update on how you're thinking about SADA from an EPS contribution for the year?

I can't talk about SADA from an EPS contribution for the year. What I will say is that I don't think we updated it in May. I think the last time we updated it was in February. But here's what I would say. The dynamics of the SADA business have changed somewhat. We're refocusing on the mid-market clients. We're refocusing on net new, and we're expanding the services capability. That was part of the reason that we acquired SADA to start off with as it relates to GCP and Google Workspace products specifically. All of that is reflected in the guidance range that we are reaffirming of 1060 and 1090 at the end of this year. We do expect them to perform at a higher rate and be accretive in the second half versus the first half.

Just to add on to that, I just want to emphasize the whole focus of our SADA acquisition is to expand our multi-cloud capability strategically. It is very well aligned with our overall plan, super critical to customers, and we believe it's going to be a major capability for us as Gen AI starts becoming more financially impactful. We really like it. We just have to be nimble enough to adjust to the priorities that Google has for us as a partner, and we're doing that.

Got it. Okay. Maybe just changing to a completely different subject. Joyce, you mentioned the global outage in your prepared remarks, and obviously it sounds like you did a good job of helping customers through that. I'm just wondering, more broadly speaking, now that the month of July is over, how has that impacted your security business, cybersecurity business growth trajectory in the month of July? Was there push-outs to closing? Is there re-evaluations going on? And are you seeing any impact beyond just the cybersecurity business where customers might want to pause and push-out other projects beyond cybersecurity?

I think it's caused us to have a lot of conversations about the resilience of our customers' environments, which is something we're very happy to do. I don't think we'd see it necessarily in the numbers in July, because that would be a really fast turnaround, but we are definitely having different conversations about, as I said, business continuity and resilience across our portfolio. So, no financial implications, obvious in the July results, but definitely it's ramped up the focus and the conversation. And just the choices that our clients have around how to make sure that their business is set up for success and is as resilient as possible.

Okay, that's it for me. Thank you.

Thank you. The next question is from Anthony Lebiedzinski from Sidoti & Company LLC. The line is now open. Please go ahead.

Good morning, and thank you for taking the questions. So certainly a lot of discussion about SADA and its performance there. Just wondering, for the quarter, your gross profit was up 5%. Just wanted to get a better handle on your organic growth. So given SADA's performance, and I guess as far as the other two smaller acquisitions, did you guys see actually organic growth actually in gross profit dollars in a quarter? Or maybe if you could just give more specifics in terms of your organic business versus the acquisitions.

Without going into details around it, we had organic growth in Q2.

And Glynis said SADA was decretive. So --

Sorry, not at the gross profit line. SADA was contributed at the gross profit line. They were decretive at the EFO and EBITDA line. But they were part of our improvement in gross profit at the GP line. But organically, our business also grew. We have had historically over the last year, even with the revenue declines that we have shown, and even without the impact of acquisitions, we have had gross margin expansion associated with just the pricing and profitability initiatives that we've taken. So we've had gross margin expansion around hardware, even as hardware has declined. And we've had gross margin expansion around services as well.

Got you. Okay. And just to follow up on the profitability and the pricing initiatives, I mean, do you think you have additional opportunities here in the back half, or do you think you're mostly tapped out of those initiatives?

Anthony, what I would say is that I think we do have a little bit of incremental value that we can get out of the pricing and profitability initiatives. But I think more importantly, those initiatives are now foundational. They're structural changes that we made with regard to how we do business, how our salespeople sell in the marketplace, etcetera. So as we return to growth, we think that those foundational and structural changes that we've made around our pricing strategy will be embedded in the business. And that we'll see the benefit from in terms of higher gross profit dollars on the base of higher gross margin that we have. Incrementally, our gross margin may increase somewhat, but I think the greater value will be as we return to growth and the gross profit dollars that flow through on our base of higher gross margin side.

Got you. Okay. And lastly for me, as far as your acquisitions outlook for that, clearly you've done a lot of acquisitions over the years, including three deals the last 12 months or so. Are you focusing more on absorbing these acquisitions near term, or should we expect some additional deals here? How are you guys thinking about that?

We've been very specific about our M&A strategy, and we said we wanted to develop a programmatic M&A strategy that allowed us to add capabilities or augment capabilities in the fastest growing areas of the market. We're very committed to doing that. We also said that we would be opportunistic about --scale acquisitions, so that hasn't changed.

Got it. Thank you very much, and best of luck.

Thank you.

Thank you. The next question is from Vincent Colicchio from Barrington Research. The line is now open. Please go ahead.

Yes, I'm curious how your generative AI activities have been evolving on the services side. Are you seeing more work? What does the pipeline look like?

Thanks, Vince. Yeah, so we are making some investments in Gen AI, but first of all, let me start by saying there's a lot of kicking up tires. There's a lot of POCs. There's a lot of discussion about it. There's a lot of conversations about governance, data readiness, and we are seeing some benefit of that in our services business, but it is really small still. So, it's not meaningful from a financial point of view yet, but we are excited about the IP we are developing that helps science get to outcomes faster. We are excited about the formalizing our offers around how we do assessments and then how we do ongoing sort of managed Gen AI, which is going to be, I think, quite important because use case development is quite specific, and it takes some time, and once you do one, you want to do more. So, we are formalizing our offer development around that, and then we're also in the process of building a virtual lab that allows us to demo these use cases and hopefully accelerate the adoption with chat-bots or summarization tools or whatever. So, lots and lots of discussion, lots of activity, mostly POCs, a bit of data preparation work, certainly some governance and policy work, but not meaningful in terms of financial outcomes yet.

Can you talk to the divergence, perhaps, of performance across client segments of enterprises, SMB, and government?

Yes. So, our overall -- so, our strongest segment is our commercial segment, so think about that as really mid-market and low-end of corporate. We saw growth there in Q2, which is encouraging. Generally, the trends have been that we see growth in that segment first, and then that growth sort of expands to include the other segments later. We see -- our public sector business is largely state and local government, and that is -- we see some improvement in that segment, and then enterprise is still a little bit challenged, but moving in the right direction. Yes, they're all moving in the right direction. We expect them all to grow for the year.

Thank you.

Thank you. This is the end of Q&A session, and I'd like to hand over to Joyce Mullen for closing remarks.

Thank you all very much again for joining today. We're very excited about the opportunities ahead of us despite sort of this choppy demand environment that we're in. I look forward to sharing our continued progress on our journey into becoming the leading solutions integrator. So, Kiki you can now close the call thank you.

Thank you. This concludes today’s conference call. You may now disconnect your lines.