Hello, everyone, and thank you for standing by for the Insight Enterprises fourth quarter 2024 operating results. We should be underway in one minute's time, and thank you for your patience in the meanwhile. Hello, everyone, and welcome to today's Insight Enterprises fourth quarter 2024 operating results call. My name is Seb, and I'll be the operator for your call today. If you would like to ask a question during the Q&A session, please press star one on your telephone keypad. If you would like to withdraw your question, please press star two. I will now hand the floor to Ryan Miyasato to begin. 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, 2024. I'm Ryan Miyasato, Investor Relations Director of Insight Enterprises, and joining me is Joyce Mullen, President and Chief Executive Officer, and James Morgado, 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 6, 2025. This call is a 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 2024 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 US 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 four. Joyce?

Thank you very much, Ryan. Good morning, everyone, and thank you for joining us today. As we close out 2024, we delivered results consistent with our expectations. Here are the Q4 highlights. Gross profit was up 1%, driven by a 12% increase in Insight Core Services and modest growth in hardware and cloud, partially offset by a decline in the impact of the partner program changes we've previously discussed. For the first time in eight quarters, hardware gross profit grew as we drove improved client buying patterns. We expect client buying patterns will build during 2025. Gross margin expanded 170 basis points to 21.2%, and adjusted diluted earnings per share were $2.66, resulting in full-year earnings per share near the high end of the range we provided in October. Cash flow from operations was $215 million. We have completed the SG&A actions discussed last quarter and expect approximately $25 million in annualized reductions. In 2024, clients continued to exercise caution due to the macroeconomic environment, which influenced their investment priorities and prolonged decision-making. Revenue from hardware, particularly in North America, declined as corporate and large enterprise clients delayed their device refresh cycle, now expected in 2025 and 2026. Commercial client demand, on the other hand, grew over the last three quarters. Partner program changes created headwinds requiring us to pivot our cloud business. Despite the program changes, we had steady cash flow from cloud consumption. We took critical steps forward with our offerings across key growth areas. Cloud gross profit grew double digits, reflecting increased demand for SaaS and infrastructure as a service, as well as the contributions from our acquisitions. Insight Core Services gross profit grew double digits, driven by our acquisitions. We continued building expertise and scale in areas important to our clients, particularly in GCP, ServiceNow, and…

Thank you, Joyce. Good morning, everyone. Our Q4 results were in line with our expectations for the quarter. Net revenue was $2.1 billion, a decrease of 7%. The decrease was driven by a 10% decline in product, primarily from continued weakness in large enterprise and corporate clients in North America. Hardware revenue declined 2%, and on-prem software was down 23%. The decline in on-prem software is primarily related to a partner consolidation that shifted gross product revenue to net agency services. Gross profit increased 1%, reflecting the double-digit Insight Core Services growth and moderate cloud and hardware growth, partially offset by declines in legacy enterprise agreements and on-prem software. Diving a little deeper into hardware, devices gross profit was up mid-single digits, and infrastructure was down mid-single digits. Insight Core Services gross profit was $78 million, an increase of 12%, driven by the benefit of our acquisitions. Cloud gross profit was $125 million, an increase of 3%, reflecting the anniversary of the SADA acquisition and our pivot to the mid-market, as well as a decline in legacy Microsoft enterprise agreements. Gross margin was 21.2%, an increase of 170 basis points, and reflects a higher mix of Insight Core Services and cloud. Adjusted SG&A grew 8% due to one-time items as well as the impact of acquisitions. This resulted in an adjusted EBITDA of $141 million, a decrease of 11%, while margin contracted 30 basis points to 6.8%. Adjusted diluted earnings per share were $2.66, down 11%. The decline was due to higher SG&A expenses and an increase in interest expense, primarily related to our recent acquisitions and share buybacks, partially offset by favorable tax impact. Overall, 2024 was a challenging year that fell short of our expectations entering the year. Hardware growth did not materialize as expected, and we absorbed…

Thanks, James. To recap, for the year, we delivered positive results in strategic areas of the business despite a challenging environment. Cloud and Insight Core Services gross profit grew double digits. Gross margin expanded, reflecting a favorable mix of cloud and Insight Core Services and benefits from our acquisitions. Adjusted EBITDA margin expanded 50 basis points, and cash flow from operations was strong at over $630 million. As we transition into 2025, our goal remains clear: to become the leading solutions integrator by consistently delivering exceptional value to our clients. The demand for transformation across cloud, data, AI, and cyber solutions is accelerating, and we are uniquely positioned to capture market share as growth returns. We have made structural improvements to our business in these challenging times. We've built discipline around our pricing and profitability initiatives, invested in our go-to-market teams to deliver on commitments to our partners and clients, developed nearshore and offshore capabilities to better serve our clients, upgraded our e-commerce and cloud commerce platforms, and acquired market-leading services businesses to improve our portfolio and increase cross-sell opportunities. I would like to thank our teammates for their unwavering 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 to our clients. This concludes my comments, and we will now open the line for your questions.

Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, please press star two.

The first question is from Joseph Cardoso at JPMorgan. Please go ahead.

Thank you. Good morning. Thanks for the question. You know, maybe for the first one here, just wanted to see if we can dig a little bit deeper into the cloud program changes, particularly as it relates to your Microsoft and Google businesses. Just trying to better understand the two businesses as it relates to the cloud headwinds that you called out for 2025? And then maybe you can just touch on the actions that you guys are taking or are going to take to kind of offset those headwinds and then, you know, how do you expect those to kind of ramp or unfold as we kind of progress through the quarters or years? And then I have a follow-up. Thank you.

Morning, Joe. Thank you. Yes. So the $70 million impact that James has talked about is really more heavily weighted towards enterprise agreements. So that has been the biggest change, but obviously, we group them together because the Google program changes were also significant, and we talked about those a fair amount last year. The mitigation actions are primarily around ensuring we transition enterprise agreements in the small and medium business and corporate space into CSP agreements. And that activity has been underway for quite some time, and our plan is to accelerate that activity. We've seen a lot of great support from Microsoft recently around making CSP the hero motion for that segment of business. They are very much digging into that and doubling down with us. So we're encouraged by that, and we expect to see that transition happen throughout most of the year and probably a bit into 2026 as enterprise agreements roll off. The other thing that we've done specifically, one more thing, Joe. So since this is the medium and corporate space, as we call it, we have invested over the past, I don't know, decade or so in our cloud commerce platform, and obviously, that digital engagement is very, very important to economically get supporting those clients. And we are really, really excited about the improvements that we've made there, and we see really terrific customer satisfaction and renewal rates there. So that's also helpful.

Got it. Thank you, Joyce. And then maybe just as my follow-up, and this is more on the outlook. If I'm doing the back of the envelope math correctly, it looks like the implied operating margins for next year are tracking a bit softer relative to 2024. Maybe the better way of asking this is it looks like OpEx is expected to outpace gross profit growth. I guess, first, am I doing the math correctly there? And then if so, can you maybe just touch on the drivers of the OpEx expansion? You know, I think over the past, like, year or so, you kind of had this target of growing OpEx lower than gross profit growth. So just curious, you know, what's driving kind of this outsized expansion over the gross profit outlook that you expect for next year? And then maybe, you know, can you just share that in the context of some of the cost actions and efficiency initiatives that you've discussed in the prior quarter and obviously on this call itself. And, like, where are we at with those? And are those fully embedded into kind of the outlook that you provided? Thank you.

Yeah. Thanks. Thanks, Joe. But I'll start, and Joyce, there's anything you'd like to add. But, actually, Joe, what we're looking at is OpEx would grow slightly slower than gross profit. You know, and our operating leverage as the year progresses, we would expect that to improve. One of the big factors is the program changes that we just described in terms of earlier in the year having an impact on the operating leverage. But as the year progresses, we should see that improve. But for the full year, we would expect OpEx to grow slightly slower than gross profit. A couple of things give us confidence in that. First is the $25 million of actions that we've taken. We expect to realize that on an annualized basis in 2025. Also, if you look at our headcount, our headcount starting point is lower than it was as we enter 2024. The headcount reductions there, just to be very specific, have been around support functions. We've tried to preserve capacity for both our sales and technical talent. Also, as you look at our OpEx, our acquisitions have all either hit their anniversary date or will be hitting it shortly. So you'll see a more normalized OpEx as the year progresses.

Makes sense. Thanks, James. Appreciate the colors.

Our next question comes from Adam Tindle at Raymond James. Please go ahead.

Hi. Good morning. Thanks. Joyce, I just wanted to start when you were talking about, you know, a little bit of hardware growth in Q4, which is great to see and some green shoots there. And then as you described the device cycle, I think you mentioned, you know, thinking that would be 2025 and 2026, which that second part was a little bit newer to me. I guess maybe the question would be based on what you now know now and what you're seeing here at the turn of the year, you could revisit the timing and magnitude of the device cycle.

Yeah. So we had expected that device refresh cycle to start earlier. We have seen growth now three quarters in a row in the commercial business, particularly around devices, and that generally is a precursor to other segments. We saw some nice improvement in the public sector as well this quarter on the top line in particular. And so we think, though, and we're, you know, we are feeling better about pipeline coverage when it comes to devices, etcetera. So we are feeling better about it. I think we have anticipated that the vast majority of the refresh would be complete by the time that the Windows 11 support requirements kicked in. That we're just kind of running out of time. So that's why we're saying it's likely to bleed over to 2026. But, you know, we are optimistic that we will see this improvement, and we are seeing it, as I said, in our pipeline coverage, and we're seeing it in bookings. And we're also, as I said, seeing it in our commercial business, and we expect that to lead through eventually to our corporate and enterprise space. We're feeling optimistic, but, you know, we're probably a bit cautious on the speed of that just because we've been talking about it for quite some time.

Understandable. James, maybe this is a follow-up. I think you've given some helpful color in terms of quantifying the various moving parts, but maybe we could just ask to sum up. As we think about 2025, you know, your EPS guidance is for modest growth, which, you know, in light of all the moving parts and headwinds that you're incurring, it's pretty commendable. If you could just, you know, kind of summarize and unpack the major buckets of headwinds, the $70 million, etcetera, and tailwinds, financing costs, incremental benefit from restructuring, just so we can kind of bridge our earnings for 2025 and understand what's going on in the underlying business. And with that, if you could also maybe just touch on cash flow given it's been so strong. I'm wondering what should be thinking about for 2025. Thanks.

Yeah. Thanks, Adam. So in terms of headwinds, I think we called it out in the prepared remarks. First and foremost is around this pivot. We have clearly encouraging signs, but we have work to do on that side. And so that's probably one of the largest headwinds that we're faced with this year. If you go below our EPS, so interest expense is one of the items that is a headwind as well, and that is really simply a factor of us settling the convertible notes through cash and using our ABL, which, you know, the convert today sits at a nominal rate. And when you look at shifting this to the ABL, that's SOFR plus a bit. And so that creates a bit of a headwind. We have share count that largely offsets that, though, in terms of, and the reason for that, Adam, is we have warrants that are associated with this convert. And as we settle those warrants with cash, we're going to settle a portion of them with cash. That has the effect of reducing our share count. So those sort of offset below the line. Tax rates, we had some favorable items in Q4. So we go back to our historical rate of somewhere between 25% and 26%. If we pop back up above the line, there are some areas that are also encouraging. It is still early, but they are encouraging. You know, I think we've called them out in terms of, you know, the commercial business, several quarters of growth now. You know, that should move up segment into corporate and then ultimately into enterprise, which we think there will be some tailwinds from that. And then, you know, our services business. I would say that we're entering the year, Joyce commented on this in the prepared remarks. I think we're entering the year with the best portfolio, I think, that we've ever had in the history of the company. You know, and that has been bolstered by the acquisitions. Even SADA's pivot that they've been going through, their focus on the services business has been quite encouraging. And so we have a set of tailwinds that I think will help us to offset some of the headwinds that are primarily around the partner program changes. Joyce, I don't know if there's anything else I can add.

A couple of other things I would add. So we actually saw also, we didn't talk about it earlier, Adam, but saw some infrastructure growth actually in the quarter, which we're also encouraged by. So we feel like that is ripe for refresh. There's a bunch of aging networking servers out there. Servers actually grew double digits for us, which was really terrific to see in addition to the overall and a little bit of networking growth, which is great. I think the cross-selling initiatives that we've built around our new services capabilities have really kicked in, and so we expect those to grow over time. And then, you know, SaaS and IaaS are going to continue to remain strong in terms of growth as part of the cloud picture. The final thing that I'd just like to say is, you know, we built a program a couple of years ago that was all about improving profitability in our services business in particular, but also our hardware and software business. That worked really, really well. We've applied that same approach to growth now. And, specifically, we have reduced the scope of our specialty sales teammates so that they are very, very focused on going very deep with technologies and expertise in areas of our business like specifically infrastructure or like ServiceNow or like Google or like Microsoft. And that has helped drive a bunch of a much better alignment with our partners. So we're feeling like that is really promising as well. So I think all those things taken together give us the confidence to deliver the same outlook that James has provided.

Thank you. That's helpful. And cash flow real quick, James?

Oh, yeah. So cash flow, if you look at our guidance, we're returning back to the historical guide if you look at that as a percentage of net income. The last couple of years, we've clearly had very, very strong cash flow. It's well outside our typical long-term guidance, and that has been primarily driven by, obviously, some improvements in the cash conversion cycle. But hardware has been a key driver of that cash flow in terms of hardware being down, and so it's been a bit of a boost to cash flow. As we enter 2025 and we see a return of kind of normal historical range of growth in the hardware business, that's going to bring our cash flow back into our typical range.

Got it. Thank you.

Our next question is from Anthony Labidzinski from Sidoti & Company. Please go ahead.

Good morning, and thank you for taking the questions. I apologize. I joined the call a little bit late. But just overall, how should we think about the potential impact of tariffs on your business, and whether, like, how much of potential and existing tariffs on your business of that uncertainty is reflected in your guidance?

Thank you, Anthony. You know, we have modeled the tariff impact six ways to Sunday, and we are pretty clear on the impacts that would occur at various rates that have been sort of all over the news in trying to figure that out. We've been working very, very closely with our OEM partners to understand the exposure of their products, which is really how the tariffs would reach our clients. In essence, the way we worked through this when we did this a few years ago was we passed on the incremental cost to our clients. So we see generally a resulting ASP increase in whatever category is impacted. And right now, with the current tariffs as they stand, we don't expect much elasticity impact. So in other words, we don't expect the 10% tariff that we know about to have a big impact on demand. If those change, those numbers change, we have a pretty good sense of what would impact that. And so our guidance, I think, contemplates minimal impact from tariffs but contemplates the current tariffs that exist.

Understood. I know it remains a dynamic situation there. Now as far as the structural improvements of the business that you guys talked about, do you think there are some other opportunities, or do you think you're mostly tapped out of those opportunities to improve the structure of your business?

Oh, we are so not tapped out, Anthony. If you look, I mean, we benchmark the best of the best that we can find out there in terms of profitability on hardware and software, and we best far best of the best we can find out there in terms of profitability around services, and those are our targets. So we have room to improve those for sure. And as James talked about, we also think a little bit of growth that we have in this plan also allows us to leverage our OpEx, and that should continue with more growth. So we have a lot of opportunity for improvement still.

Hey, Anthony. I know you didn't ask this question, but I thought I would put it out there anyway in terms of the profile of the year. I commented on it in the prepared remarks, but in saying that the year would pan out in such a way that the second half would be stronger than the first half. In particular, I want to comment on Q1. Our Q1, we are facing, you know, really strong compares from the previous year. We had really strong results in Q1 of 2024. And so as we think of the profile of the year, and I don't use the word seasonality because I'm not quite sure we know what a normal seasonality looks like anymore. But we can comment on the profile of the year. And that would be, you know, Q1 is facing tough compares, and we would expect that this builds as the year goes with a much stronger second half than first half.

Tough compares and an outsized impact of the program changes.

Yes. Understood with that. Okay. But also, you did say at the beginning, I think, Joyce, that you are seeing some solid bookings momentum in the business. So as far as the timing of that, when that translates to revenue, is that also you think more back half of the year? So then are you, is that...

Sorry. Yeah, we would expect demand to improve throughout the year.

Yeah.

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

Thank you.

Final reminder for any further questions. We have no further questions on the call. So I will hand back to Joyce for any concluding remarks.

Thank you very much to all of you for your questions and your interest. Our clients require a trusted adviser to help them navigate this increasingly fragmented and complicated landscape. And we are excited about the opportunities ahead of us, and I look forward to sharing our continued progress on our journey to become the leading solutions integrator. Thank you very much. Operator, you can close the call.

Thank you very much for joining today's Insight Enterprises fourth quarter call. You may now disconnect.