Insight Enterprises, Inc.

Good day, and thank you for standing by. Welcome to the Insight Enterprises Incorporated second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Ms. Glynis Bryan, Chief Financial Officer, please go ahead. Thank you, Pasha. 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, 2021. I'm Glynis Bryan, Chief Financial Officer of Insight, and joining me is Ken Laminick, President and Chief Executive Officer. If you do not have a copy of the earnings release and the accompanying slide presentation, that were posted this morning and filed with the Securities and Exchange Commission on Form 8K, you will find them on our website at insight.com under our Investor Relations section. Today's call, including the question and answer period, is being webcast live and can be accessed by 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 webcasts contain time-sensitive information that is accurate only as of today, August 5th, 2021. 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 2021 financial results. When referring to non-GAAP measures, we will refer to such measures as adjusted. Non-GAAP measures to be discussed in today's call include adjusted selling and administrative expenses, also referred to as adjusted SG&A, adjusted earnings from operations, adjusted earnings before interest, taxes, depreciation, and amortization, also referred to as adjusted EBITDA, adjusted diluted earnings per share, including the benefit of the note hedge on our convertible debts, and also adjusted return on investment capital. You will find a reconciliation of these adjusted measures to our actual GAAP results included in either the press release or the accompanying slide presentation issued earlier today. Also, please note that unless highlighted as constant currency, all amounts and growth rates are discussed 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 on our most recently filed periodic reports and subsequent findings with the SEC. With that, I will now turn the call over to Ken, and if you're following along with the slide presentation, we will begin on slide four. Ken?

Thank you, Glynis. Good morning, and thank you for joining us today to discuss our second quarter 2021 operating results. I want to start off by thanking our teammates for the harmony, heart, and most notably the hunger they've shown through the first half of the year. Through these values, we are executing the strategy that will help us and our clients accelerate the technology of tomorrow. While supply constraints continue to be a challenge during the quarter, we remain focused on executing our financial and operating priorities for the year and supporting our clients' inventory needs. During the second quarter, I'm pleased to report that our business saw double-digit top-line growth across all major categories of net sales. Gross margin was 16.4%, strong performance given compression on margins due to increased hardware net sales. Adjusted earnings from operations increased 6% and drove adjusted return on invested capital to 13.6%, up from 12.1% in the second quarter last year. Hardware booking trends continued strong throughout the second quarter. Given the ongoing supply constraints and longer lead times required for hardware orders, we're supporting our clients by helping them with forecast their inventory needs, ensuring they're well positioned in the queue for fulfillment in the amounts necessary to meet those needs. As a result, we exited the second quarter with further elevated backlog from levels at the start of the quarter. We expect about 50% of this backlog will shift in Q3. We're pleased to see the pipeline for future sales build to healthy levels for the second half of the year and into 2022. Clients continue to focus on business agility and continuity by leveraging cloud solutions. Our clear strategy and deep expertise delivering digital solutions allowed us to grow cloud sales of SaaS and infrastructure as a service high double digits in the quarter. This drove cloud gross profit to 22%, up more than 300 basis points year over year for the trailing 12 months. We're happy with our team's continued operational execution in the second quarter, and our visibility to the second half gives us confidence in guiding net sales at the high end of our range, as well as increasing our EPS guidance. As we help companies shift to cloud-based solutions and modernize their infrastructure, we're also engaged in discussions around finding solutions that help clients incorporate emerging technology into their business operations. We believe these companies that maximize the value of IT and data will emerge as the new leaders. As the business and technology landscapes have drastically changed over the past 15 months, we've been well-positioned to address the greatest needs of organizations and to help them make sense of operations such as accelerating the intelligent edge and using artificial intelligence or AI and the Internet of Things to scale and leverage data to drive real-time decision-making, which is essential to achieving growth, cost savings, and market differentiation. Recently, we were named NVIDIA's 2020 Software Partner of the Year. As an advanced technology partner, we use their technology to support organizations in utilizing deep learning to gain a competitive advantage. Our technical consultants and engineers help clients modernize their infrastructure to support cutting-edge AI, machine learning, and deep learning solutions tailored to individual client needs. One example of a type of AI that allows computers to understand and label images is computer vision. Computer vision uses advanced analytics to analyze, understand, and respond to digital images. Each solution is tested and validated at our in-house AI proof of concept lab, utilizing the client's data sets and the latest generation of AI-ready platforms, including the NVIDIA DGX system to reduce risk and ensure smooth deployments. If you recall, we were recognized in Q4 2020 as the Forrester New Wave for computer vision consultancies as a strong performer, highlighting their expertise in computer vision solutions. As companies move to a more digital way of life, we've established the expertise and proven strategies to guide organizations through digital-first business practices. As technology has the potential to radically transform industries, we know it's important to better understand the awareness, adoption, and perceptions of these new technologies. This drove us to commission IDG to conduct a survey of business and IT leaders on their perceptions of computer vision. Survey results indicated that the overwhelming majority of respondents agree that computer vision has incredible potential to transform key areas of business. This technology uses predictive analytics to improve security and employee safety, detect defects during production and manufacturing, and improve customer experiences. For example, we recently worked with a printer ink manufacturer to use computer vision to count pallets with a quick snap of photos. enabling people, including those with disabilities, to take on greater warehouse responsibilities while creating more accurate inventory counts. Similarly, we've helped a steel company through computer vision identify hazardous materials before they inadvertently land in a smelter to be recycled. I've discussed before the pandemic accelerated technology and our ability to pivot and meet clients where they are today, while helping them prepare for tomorrow, has been instrumental in making us the technology partner of choice for our clients. Our success is rooted in differentiation from our competition for our company values, industry expertise, diverse solution offerings, and our ability to create meaningful connections. It is in these connections that we showcase our ability to meet clients' needs through the use of multiple solutions. For example, our technical consultants designed a greenfield data center to support a client's current infrastructure. During the evaluation process, our consultants identified opportunities for the clients to modernize their out-of-date applications by utilizing our digital technology experts. Working for a client, our architecture team develops solutions that fit the environment. The data center solution includes a new hyper-converged infrastructure, Dell core switches, VMware right-sizing and Microsoft licensing, and networking infrastructure deployment services through the data center architecture team. The client will also benefit from insight-managed one-call support services. What started off as a single solution ended up as a multi-phase approach with us providing services across our solution areas. Additionally, the client requested that we evaluate their security strategy. We believe the strategic investments we made in our go-to-market solution areas over the last several years position us well to execute our business goals. Our solution teams are key to achieving our long-term priorities and driving value for our shareholders. Given our strong execution, bringing cloud and digital solutions to our clients, we're proud to announce we improved 49 spots on Fortune's Fortune 500 rankings currently at number 360. We were only one of 11 providers globally to be recognized in the Gartner Magic Quadrant for Software Asset Management Services, and we earned four of Microsoft's most prestigious awards after a record-setting year. Before I turn the call over to Glynis, I'd like to acknowledge our teammates who were recently recognized as top leaders in their respective fields. Glynis was recognized among the top 100 women leaders in technology in 2021 by Women We Admire, and also honored as one of Phoenix Business Journal's most admired leaders. Our Chief Information Officer, Jeff Shumway, was named Global CIO of the Year by Arizona CIO. And his 16 teammates were recognized with CRN Women in the Channel Awards, and four of those have been named to CRN's Power 60 solution providers. At Insight, we're proud of our commitment to embrace diverse backgrounds, appreciate diverse skill sets, and respect additional viewpoints. Bracing diversity is important to our corporate culture, and our focus in this area was recognized in Forbes 2021, America's Best Employers for Diversity. We have so much to be proud of at Insight, proud of our brand, our culture, and our values, and especially our teammates. I'll now hand the call over to Glynis to review the details of our financial performance.

Thank you, Ken. In the second quarter of 2021, we executed well against our strategic and financial priorities, posting continued growth across our business, one year out from our lowest point of the pandemic in Q2 2020. We accomplished this while continuing to invest in strategic areas to scale and support our future growth. Moving on to slides 12 and 13 for consolidated results. Our net sales in the second quarter were $2.2 billion, up 13% in U.S. dollars and 10% in constant currency compared to the second quarter of 2020 across all categories. Gross margin was 16.4%. In light of increased hardware net sales, which compressed our margins, we saw only a 10 basis point contraction year to year. SG&A expenses were up 10.5% year-over-year in constant currency and 14.2% in U.S. dollars. As a percentage of net sales, adjusted SG&A was 12.1%, up 30 basis points year-over-year, but in line with our expectations for the quarter. As a percentage of net sales, SG&A on a GAAP basis was 12.4%, up 10 basis points year-over-year, For the full year, we continue to expect adjusted SG&A as a percentage of net sales will be 11.7%. Adjusted earnings from operations was $97.7 million, up 6% year-over-year, compared to a 19% increase on a gap basis. And adjusted diluted earnings per share was $1.91 and $1.58 per share on a gap basis. Results for each of our operating segments were as follows. Let's start with North America operating results in slide 14. Net sales were $1.8 billion in the second quarter, up 14% year-over-year, due to increase in software licensing sales, hardware sales driven by devices, networking, and storage solutions, and services driven by cloud solutions. Similar to last quarter, as a result of supply constraints and extended product lead times, we're entering the third quarter with higher backlog. Growth positives $279 million in North America was up 14% year-over-year, and gross margin was 15.8% compared to 15.9% in the prior year. North America's adjusted SG&A increased 16% year-over-year to 11.7% of net sales, driven by increases in overall teammate headcount and variable compensation due to higher gross profit attainment, and also new variable compensation plans implemented January 1st. SG&A has a percentage of net sales on a gap basis, was 12.2% in the second quarter. For the full year of 2021, we continue to expect adjusted SG&A as the percent of sales will be 11.3%. Adjusted earnings from operations increased 8% year-over-year to $72 million for the quarter. On a GAAP basis, earnings from operations increased 23% year-over-year to $64 million. Moving on to EMEA on slide 2015, net sales in the second quarter decreased 4% year-over-year in constant currency to $417 million, while gross profit decreased 3% year-over-year, also in constant currency. These results were against a strong compare in the prior year, where MESL growth in both net sales and gross profit year-over-year. When combined with operating leverage from lower SG&A, this led to adjusted earnings from operations of $20 million in the current quarter, a decrease of $2.4 million in constant currency. Moving on to APAC in slide 16, net sales of $52.5 million and gross profit of $14.3 million in the second quarter increased 24 and 11% respectively year-over-year in constant currency due to higher sales across all categories. We made investments in the business resulting in a 14% increase in constant currency in SG&A, and this led to adjusted earnings from operations of $5 million in the quarter, up 6% in constant currency. Moving on to our tax rate, our effective tax rate for the second quarter of 2021 was 25.4% compared to 26.2% in the prior year quarter. The lower effective tax rate was primarily due to foreign rate adjustments, offset in part by an increase in the state income tax base. Turning to the details of our second quarter cash flow performance in slide 17, year-to-date through the second quarter of 2021, we primarily invested in our operations, generating cash flow of $5 million compared to $498 million during the same period last year. This decrease year-to-year is due to changes in partner mix and net sales growth with our inverted cash cycle, which resulted in lower cash flow operations generated in the first half of 2021 compared to the first half of 2020. In addition, there were discrete items in 2020 that contributed the majority of the variance, approximately $280 million. This consisted of partner payment deferrals and a large customer advance payment in the prior year with no comparable activity in the current year and deferred and in some cases reduced federal and other taxes to COVID-19 relief measures in the first half of 2020. We previously disclosed an expectation that cash flow from operations would normalize in 2021 as our business grows. We now expect cash flow from operations will range between $125 and $175 million as a result of double-digit hardware growth experienced in Q2 and expected to continue in the second half of 2021, higher inventory to support client deployments, as well as changes to the partner mix with our inverted cash cycle. In the first half of 2021, we invested approximately $17 million in capital expenditures, mainly related to technology and facility investment. We also received $27 million in net proceeds from the sale of three buildings, in Tempe, Arizona and our property in Woodbridge, Illinois. Lastly, we used $50 million to repurchase shares of our common stock. We now have remaining authorization of $75 million. The guidance we're providing does not include the impact of any additional repurchases. As of June 30th, 2021, we had over a billion dollars available under our ABL facility and we have ample capacity to fund future growth. At the end of the second quarter, we had a cash balance of $108 million of which $76 million was resident in our foreign subsidiaries. We had $484 million of outstanding debt, including our senior convertible notes at the end of the quarter, compared to prior cash balance of $154 million and total debt of $437 million. Moving on to liquidity on slide 18, we're exiting the quarter with a leverage position of 1.3 times debt to cash flows, or EBITDA, which was well within our comfort level. Under our ABL agreement, our primary compliance covenant is a fixed charge coverage ratio, which includes trailing 12-month EBITDA coverage over capital expenditures, taxes, and cash interest. As of June 30th, we are at 4.5 times the minimum requirement of one time, and we're confident we can support our capital requirements and liquidity needs. Moving on to our full-year cash, full-year guidance on slide 19. Today, we're increasing our previously issued guidance for 2021. We expect to deliver net sales growth at the high end of our previously stated guidance, which is between 4% to 8% over the prior year. We now expect the Jessica diluted earnings per share for the full year of 2021 to be between $6.75 and $6.90, which includes an expected $0.06 impact of the share we purchased already completed. With this outlook assumed, interest expense between $25 to $28 million, an effective tax rate of $25 to $26 million for the full year, capital expenditures of $65 to $75 million, including the build-out of our new corporate headquarters, and an average share count for the full year of 35.5 million shares. This outlook excludes the following, acquisition-related intangible, amortization expense of $32 million, the non-cash convertible debt discount and issuance cost reported as part of interest expense of approximately $12 million, and assumes no acquisition-related or severance of the short-term expenses. I'll now turn the call back to Ken.