Hello, everyone, and thank you for joining the Insight Enterprises Second Quarter 2025 Operating Results Call. My name is Sammy, and I'll be coordinating your call today. [Operator Instructions] I'll now hand over to your host, Ryan Miyasato, Director of Investor Relations, to begin. Please go ahead, Ryan.

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 30, 2025. I'm Ryan Miyasato, Investor Relations Director of Insight. 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 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, July 31, 2025. 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 second quarter 2025 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're following along with the slide presentation, we will begin on Slide 4. Joyce?

Thank you very much, Ryan. Good morning, everyone, and thank you for joining us today. In Q2, we executed well and met our expectations as we navigated a challenging environment, primarily driven by partner program changes. Our hardware business delivered growth for the second consecutive quarter, and we achieved strong profitability milestones. Total gross margin of 21.1% and adjusted earnings from operations margin of 6.2%, both Q2 records. In the quarter, hardware revenue grew 2% with growth in both devices and infrastructure. Hardware revenue in North America grew 4%. Revenue from our commercial clients grew 8%, which is the fifth consecutive quarter of growth. The underlying SaaS and Infrastructure as a Service business grew double digits and in line with expectations, offset by the partner program changes we've discussed previously. We made internal adjustments to address the program changes, and we will continue to focus on capturing growth in the cloud business. Overall, cloud gross profit declined 5%. Insight Core Services revenue was down 2% as we continue to see delays in initiating new services projects, particularly in our large enterprise clients. We also prudently managed adjusted SG&A expenses, which were down 3%. As a result, adjusted diluted earnings per share were in line with our expectations. While macroeconomic factors, including tariffs, legislative policies affecting supply chains and interest rates continue to impact our clients' investment decisions, we are well positioned in terms of expertise, particularly AI to grow as the environment improves. As the technologies we offer to our clients continue to develop, we are adapting our ambition to becoming not only the leading solutions integrator, but the leading AI-first solutions integrator. Here's what we mean by that. We are aggressively adopting AI internally across all disciplines and all regions. We've enhanced our services portfolio by integrating an AI-first…

Thank you, Joyce, and good morning, everyone. Our Q2 adjusted earnings from operations and diluted earnings per share were in line with our expectations, with gross profit slightly below, offset by strong operating expense management. Net revenue was $2.1 billion, a decrease of 3% in U.S. dollars and 4% in constant currency. The decrease was driven by a 4% decline in product, primarily due to on-prem software, which declined 14% and was a result of partner consolidation last year that shifted gross product revenue to net agency services. Hardware revenue increased 2%, the second consecutive quarter of growth. Gross profit decreased 2%, primarily due to partner program changes. Hardware gross profit was up 2%, reflecting growth in both infrastructure and devices. Insight Core Services gross profit was $78 million, a decrease of 3%, primarily due to a decline of our product attached services as large enterprise clients delayed projects. Cloud gross profit was $123 million, a decrease of 5% due to the partner program changes we've previously discussed. This was in line with our expectations. And as noted last quarter, we anticipated the headwinds to be weighted more in the first half of the year. We continue to anticipate some headwinds in Q3. However, by the time we exit Q4, we expect the impact to be largely normalized. Gross margin was 21.1%, an increase of 10 basis points. Adjusted SG&A declined 3%, driven by prudent expense management. This resulted in adjusted EBITDA of $138 million, a decrease of 2%, while margin expanded 10 basis points to 6.6%. And adjusted diluted earnings per share were $2.45, flat year-over-year in U.S. dollar terms and down 1% in constant currency. For the quarter, we utilized $177 million in cash flow from operations, primarily related to inter-quarter working capital requirements, which have reversed in…

Thank you, James. Overall, we navigated the first half of the year well. We are excited about the new technologies and the results our clients can achieve with AI. We also remain committed to the core elements of our business, which serve as a critical foundation in order for our clients to unlock the full potential of Gen AI. I want 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.

[Operator Instructions] Adam, your line is open. Please go ahead.

So James, the guidance, obviously approximately flat on gross profit dollars. As we finished up the first half, it was down about mid-single digits. So you're implying that it's got gross profit dollars have to be up around mid-single digits in the back half. And I wonder if you might just detail some of the key drivers as you thought about that improvement. It sounds like some of it's predicated on hardware improvement, but some of your competitors have suggested that there's been pull-in in hardware, in particular, and we're a little bit more cautious on the back half. So if you could maybe comment on that dynamic as well as your key drivers to hit that mid- single digit implied in the gross profit dollar growth.

Yes. Thanks, Adam. And Joyce, you can round out my comments. But Adam, I think when you think about the full year guide and the second half, you kind of have to start back how the first half landed. I'll take the major areas of the business. First, from a cloud standpoint, cloud landed in the first half at our expectations. I called out a couple of quarters ago that, that we were going to be faced this year with a $70 million gross headwind, which was in cloud, which was more weighted towards the first half. And we -- and landing at our expectations gives us a good setup, I think, for the second half. Additionally, when we look at our cloud business, we look at Infrastructure as a Service and Software as a Service has been growing nicely. Q2 was at a similar rate to the Q1 rate, which I think also gives us a good setup for the second half. And so that's why from a cloud perspective, we're able to hold our view that cloud would be flat to slightly down. The second key piece of this, as you mentioned, was around hardware. Hardware in the first quarter grew 1% from a GP standpoint. Q2 accelerated a little bit to 2%. We didn't see pull-ins, as others have mentioned. We saw some, but it wasn't material to the number. And so that dynamic hasn't really played out for us in the first half, like you may hear from others. Additionally, as we looked at bookings in Q2 and as Q3 has started, I think it supports the premise that hardware will continue to accelerate as we get into the second half. When you look at our commercial business, for example, it's 5 quarters of consecutive growth. Corporate and enterprise from a bookings standpoint as the first half has progressed, has improved. And Q3 as well, as we started would support the fact that corporate and enterprise will continue to pick up in the second half. The third piece to this, which is the reason that you'll see that we've moderated our GP outlook is around our core services business. It started below our expectations that we had at the beginning of the year. We've moderated that down to the low single digits, which implies some modest pickup into the second half. And the reason that we're able -- when you take all those factors together, the reason we're able to hold our earnings per share was around the performance of OpEx. In the first half, OpEx was down 4% year-over-year, which was ahead of our expectations. And we would -- as we plan out for the second half and for the full year, OpEx would grow slower than gross profit. And those are the reasons that we're effectively holding our EPS.

Got it. Okay. Maybe just a follow-up for Joyce. As James was talking about managing OpEx down, and I think, obviously, in this quarter, you guys did a nice job of cost controls. But this is a trend that we're kind of seeing broadly across the industry. I think your competitor -- your main competitor just announced, maybe it's on their fourth round of layoffs or so. And I'm just -- this cost-cutting behavior across the industry is happening while devices are strong, and we're in an up cycle in PCs. So I'm just a little surprised if you were to give me that environment, I wouldn't expect a lot of the resellers and systems integrators to be cutting headcount. I wonder if you might just opine a little bit on that trend, why that's happening across the industry during a PC up cycle? And is this something that you expect to continue in the future? Is this kind of reflective of a structural change in the industry, where a lot of these models need to readjust cost structure for one reason or another?

Yes. I mean, I think we are really excited about the opportunities to implement basically AI technologies in almost every process. We are going after this pretty hard, and we're getting rid of a whole lot of soul s****** work. And we're also looking just to speed up all of our internal processes, which will eventually result in better service to our clients. So this is -- the productivity improvement is real. It's -- we see it very markedly in our software development efforts. We see it more gradually taking hold in sort of all the back-end business processes. And what that allows us to do is basically hold headcount flat while we increase -- some elements of our business are growing. So we think this is a good thing, and we also are helping our clients do the same. So the PC demand is going to be driven primarily by the aging of the fleets and also Windows 11. And we're not expecting that PC demand to mirror kind of the peaks that we saw 3 years ago at all, but we are seeing -- there is a real necessity to upgrade these systems. So I think these 2 things -- I think the normal curves, Adam, are starting to diverge a little bit because we do expect to see productivity improvements. And by the way, that's a huge opportunity for us to help clients do the same.

Our next question comes from Joseph Cardoso from JPMorgan.

Maybe just for my first one, you obviously mentioned delays in services projects with large enterprises again. I was just hoping you could provide an updated thoughts around the drivers behind this behavior. Do you have any other transparency around what's really being the motivation here around delays outside of maybe the broader macro? And if there's anything else structurally like around AI investments, et cetera, that could be driving it? And then the second part of that is just how are you assessing the potential timing for your customers to kind of reengage on these large projects? Do you have any visibility in terms of when you could potentially see them come back? And then I have a follow-up.

Yes. Sure, Joe. So yes, the macro is certainly an element. So there's kind of a level of uncertainty still around many of the things that we talked about earlier in the script. But I think outside of that, the biggest driver is this notion of how to -- like thinking about -- thinking through no regret moves around investments given the focus on leveraging AI technologies. So in other words, we know that many of our clients are trying to keep a little bit of their powder dry so that they can invest in making sure their infrastructures are effectively set up for AI, making sure that their data is appropriately managed, et cetera, et cetera. But not everyone knows exactly what to do yet. So there's still some question about how to get started. And again, this is a huge opportunity for us. So however, those projects -- those AI MVP type projects, the assessment type work that is underway that I mentioned earlier, that we're seeing pretty significant ramp up in terms of the number of those, are not big projects yet. So we expect to be delivering very pragmatic solutions to customers, leveraging these technologies that drive real business outcomes in the short term and then do another one and another one and another one. So -- and I think enterprises are keeping, as I said, some of the -- they're holding off on spending in more traditional areas to make sure they preserve capability to spend on AI as they figure out their strategies there.

Got it. Makes sense. I think for my second question, I think last quarter, you talked about cloud growth, excluding the impact of program changes tracked, if I'm remembering correctly, somewhere in the high teens. The guide that you guys put out today with the reiterated guide on cloud gross profit, if we exclude the impact, I think it's closer to mid-teens. So I'm just trying to triangulate. One, can you provide an update in terms of what cloud growth would look like this quarter, excluding the program changes? And then how you're thinking about that momentum trending going into the back half and whether you think that is sustainable just given kind of the strong performance, at least that we know that you guys did in 1Q? And then maybe just as a second part of the question, can you just update us on the initiatives around SADA and how that's been tracking?

Okay, Joe, I'll take the first part, and then I think Joyce can comment on the second part in terms of the pivot. In Q1, we called out that the underlying cloud growth was approximately 17% year-over-year, very similar in Q2, a slight acceleration over that number, but in that same range. As we look for the rest of the year, we would anticipate that, that would be similar for the rest of the year and the underlying growth. And then from a program change perspective, I've commented that the $70 million gross headwind was a little more heavily weighted towards the first half. There is still an impact into Q3 for those. And by the time we exit Q4, we expect to largely normalize and the full -- when we think about the whole second half from a cloud perspective, we would expect it to be up year-over-year.

And from a SADA point of view, we are really, really pleased with the work the team has done to move towards more of a surface focus and driving consumption and adoption for Google in that case. And that team has done a great job expanding the services business. They performed a little bit better than we expected in Q2. So that's a trend now that we've got several quarters in a row, and we couldn't be happier. In fact, all of the companies that we bought over the last 18 months or so are performing extraordinarily well. And we -- and as I said earlier, the thesis is working. We're really pleased with the cross-sell opportunities that we're seeing, and our clients are responding really, really well to that because almost everybody is multi-cloud and almost everybody has needs across some of the platforms that we've invested in, Microsoft, Google, ServiceNow and AWS.

[Operator Instructions] Our next question comes from Anthony Lebiedzinski from Sidoti & Company.

So I know you touched on a little bit as far as your commercial business in the second quarter. Just wondering if you could give us some comments about the other 2 main segments, how they did? And what is your expectation? And particularly interested actually in your comments about the public sector with all the noise about the DOGE and some of the higher ed institutions being impacted by the current administration, whether you expect to see any impact on your business?

Thanks, Anthony. Yes. So as we mentioned, the commercial business growing 5 quarters in a row, we've always been saying that we're -- we expect that to start to show up in corporate and enterprise. We're seeing some good improvement in corporate. Again, the momentum is right. So we're feeling better about that and enterprise lags in terms of growth. In terms of public sector, we had -- our overall revenue was down. That's primarily a result of netting. And so our public sector business is doing very well from a services point of view. It's doing -- we're seeing some momentum in the hardware space as well. So as a reminder, most of our public sector business is SLED, so state and local government and higher ed. And those have not been as impacted directly, but there is certainly some impact because all of that funding flows down. So we've been really cautious about that. But I'm proud of the work the team is doing to really sort of focus on the areas where there's opportunity. And there is some opportunity because some of those big contracts that are being pulled back, et cetera, in the federal government means there's still work to do, but they're going to do it differently, and we think we're well positioned to go after some of that.

Sounds good. And then I may have missed this, but in terms of the partner program changes, I know you talked about $70 million impact for the full year, mostly in the first half. Did you guys give a specific number for the second quarter, what that impact was?

We didn't give a specific number, but what I said earlier, Anthony, was that from a cloud perspective, the underlying Infrastructure as a Service, Software as a Service grew at about the same rate it did in Q1. And in Q1, we called out a 17% year-over-year growth.

And we said that the partner -- $70 million is more heavily weighted towards in the first half.

Got you. All right. And then lastly for me, as far as just thinking about the impact of these partner program changes. As you look forward to 2026, any sort of early read as to what the gross margins could look like as you get past the impact of these changes?

So by the way, partners change programs all the time. This just happens to be a very significant change this year, which is why we're talking about it. I hope we never have to talk about them again. But right now, we don't foresee any major partner program changes that would dramatically change kind of our outlook or our margins. And it's our job, of course, to adapt to those. And I think we've been doing that well, especially with Microsoft and Google changes as we talked about earlier. So we're not going to give guidance on gross margins probably until February for 2026.

I would comment, though, Anthony, just to add to what Joyce said, and Joyce mentioned this in her prepared remarks, but Q2 was a record from a Q2 standpoint from gross margin and EBITDA margin. I think that, that demonstrates our ability to manage margins. And that $70 million gross headwind that I called out is a direct impact to gross margins. So the fact that we're navigating that this year and in Q2, we're able to hold a record, I think, is -- from a Q2 standpoint, hold a record is a testament to our ability to manage margins as well as EBITDA margins. The other piece on the $70 million this year, what I've commented is that as we exit Q4, we expect that piece of it to be largely normalized into 2026. And so it becomes a far less of a headwind in 2026 than it has been in 2025.

Our next question comes from Vincent Colicchio from Barrington Research.

Yes. Joyce, what is your labor strategy to meet the burgeoning AI opportunity? I know that acquisitions, I assume, are part of that. As you mentioned, AI is an important target. On the AI side, I'm wondering if the acquisitions are currently -- the valuations are they currently prohibitive? Anyway, that's what I have.

Yes. Thanks, Vince. So you know we are very active on the M&A front, absolutely looking for more skills. But I would say it's a two-pronged approach in terms of building the capabilities and skills. One is go out and hire/acquire capabilities in the areas that are really relevant to AI, data security, cloud, advisory capabilities like we talked about earlier. But also, we have a very intense internal development program that is underway to upskill our existing teammates across the world. And we think we are in a great position because we've got a lot of great talent that are excited and eager to embrace these tools and use them. And so that program is well underway with various certifications internally and development programs, et cetera, et cetera. So we're excited about that. And more importantly, our teammates are excited about that. So it's a two-pronged approach, M&A/acquihires and also development.

And are your profitability and pricing initiatives still ongoing? Where does that stand?

Yes. Our profitability and pricing initiatives that James initiated about 2 years ago are well underway. There's -- we obviously went after the low-hanging fruit first and saw some really terrific results, but those continue, and we're expanding those to other regions.

We currently have no further questions. So at this time, I'd like to hand back to Joyce for some closing remarks.

Thank you very much to all of you for your questions and your interest. Our clients right now need a trusted adviser to navigate this evolving and complex landscape, particularly given current macroeconomic uncertainties and the anticipated long-term changes that result from the adoption of Gen AI in their operations. We are very optimistic about the opportunities ahead of us, and I look forward to sharing our continued journey -- progress on our journey to becoming an AI-first leading solutions integrator. Thank you very much. You can close the call now.

This concludes today's call. We thank everyone for joining. You may now disconnect your lines.