Insight Enterprises, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Insight Enterprises, Inc. Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker 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, CFO Glynis Bryan. Thank you. Please go ahead.

Thank you. 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, 2021. I'm Glynis Bryan, Chief Financial Officer of Insight, and joining me is Joyce Mullen, President and Chief Executive 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 8K, 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 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 webcast contain time-sensitive information that is accurate only as of today, February 10th, 2022. This call is a 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 fourth quarter and full year 2021 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 either the press release or the accompanying slide presentation issued earlier today. Please note that unless highlighted as constant currency, all amounts and growth rates are discussed 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 findings 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 four. Joyce? Thank you very much, Glynis. Hello, everyone, and thank you for joining us today to discuss our fourth quarter and full year 2021 operating results. I am so honored and very excited to address you today as the CEO of Insight. First of all, I would like to thank the dedicated teammates at Insight for their commitment to our clients, the collaboration with our partners, and their perseverance and focus on delivering strong results. 2021 was a challenging and tumultuous year in so many ways, and I could not be prouder to work with our teammates across the globe. I will talk more about our results in a few minutes. Let me start with the incredible opportunity in front of us. The market demand for Insight solutions is greater than ever before, fueled by the critical need for digital transformation, which actually has accelerated over the last two years. Many of you are familiar with the history of Insight. We entered the market as a product reseller, but a number of years ago, Ken and our leadership team saw the transformation in the IT space coming. That transformation, driven by next generation technology, required deep technical expertise. Today, we have a differentiated portfolio of solutions to help clients transform their businesses. We architect, implement, secure, and manage the solutions that maximize the value of our clients' technologies. and are well positioned to help organizations with the solutions they need to drive their digital transformation. We leverage our strong capabilities across our six areas of expertise. Modern workplace and modern applications, which are critical for migrating our clients' applications to the cloud. Modern infrastructure, which is essential for operating in a hybrid multi-cloud world with a complex set of options that require a high level of expertise and analysis. Cybersecurity, which has become vital to all organizations as information moves to the cloud and work environments shift to remote hybrid models, which are replacing the traditional office model. Data and AI, which is an area that can completely transform business operations and customer experiences. And the intelligent edge, which is estimated to become bigger than the public cloud today. Technology at the edge gathers data and processes it in the most efficient way to enable real-time decision-making. an incredibly exciting space that requires expertise in vertical, software, hardware, and services. Our solutions are delivered through a broad scope of services. Consulting services, which align our clients' business goals and digital strategies. Professional lifecycle services, which simplify the supply chain and streamline costs across global hardware and software life cycles. And managed services, which align resources and employ standardized processes and tools to deliver consistent outcomes. For example, on slide five, one of Insight's existing clients wanted to unify and shift its communications applications off-premises to the cloud across 3,500 locations. This client also wanted to decommission one of its data centers to reduce its onsite footprint. The client was specifically seeking an as-a-service solution to remove the internal administrative burden and to reduce spending. This client also established a very tight timeline. We designed and implemented one system for communications across all locations with centrally managed maintenance and ongoing support from Insight teams. Our client is now continuing to grow its cloud environment quickly, sustainably, and as their business demands. They are able to reduce costs and communications burdens on internal resources at every level. The client benefits from a new unified communication solutions and the ongoing management and maintenance is provided as a service by Insight. This is just one example of how we are working with clients to accelerate cloud adoption and improve client experience, customer experiences. What really makes our go-to-market strategy impactful is the ability to expand adjacencies within our areas of expertise. We have the ability not only to deliver immediate results for clients today, but to guide them through their longer-term digital transformation. Slide six is an example of how we helped a large global retailer improve operations, and at the same time enhance their employee experience with a modern application framework. As an existing Insight client, they wanted to drive efficiency and accuracy in customer service and stocking. At the beginning of the project, their system relied on legacy devices that were expensive and difficult to maintain and support. With our help, they have now put hundreds of thousands of new devices into employees' hands. The scale of this project is immense. giving them access to applications needed to support efficient and moderate customer service. Today, our client has modernized and automated back-end processes while improving employee and customer experiences on the front end. And Insight is managing the entire lifecycle of the program. At Insight, every client interaction is an opportunity to create value for them. Our goal is to become their partner of choice. delivering expertise and results for them as they make their way through their own transformation agendas. As I said earlier, in 2021, our teammates once again faced a challenging year, made much more complicated by global supply constraints and difficulties presented by the pandemic. Our teammates adeptly navigated the uncertainty of the macro environment and maintained focus on solving our clients' biggest technology challenges. That focus was reflected in our full year results, On an annual basis for 2021, we set company records for net sales, gross profit, adjusted earnings from operations, and adjusted diluted earnings per share. During the year, we made investments in our sales and technical talent. These teammates play a critical role in driving business outcomes and delivering a great client experience. We began our multi-year program to modernize our e-commerce experience. Early this year, our global team completed the onboarding of all of our EMEA clients and partners and teammates onto Insight's common core IT systems, tools, and processes. Our focus on culture, teammate well-being, diversity and inclusion, and leadership development continued to be acknowledged with key recognitions this year. We're on the Forbes World's Best Employers list in 2021. Insight ranked 95th overall, 12th for IT companies, and number 140 for diversity. We also achieved a perfect score on the Human Rights Campaign Foundation's 2022 Corporate Equality Index, and we achieved notable recognitions from our partners around the globe as shown on slide seven and eight. While we are very proud of these accomplishments, we are focused on the opportunities ahead of us. We will be hosting an investor day in the fourth quarter, but in the meantime, our four primary business goals on slide nine are first, earn client loyalty. This business is a people business, and we earn loyalty by being client-obsessed and delivering exceptional client results. Second, lead with innovative services and solutions. We deliver differentiated client outcomes by leveraging our broad solutions portfolio, expanding our six areas of technical expertise, our solution skills, and our partner relationships. Third, drive profitable growth through high-value solutions supported by operational excellence and integrated global systems. And fourth, champion people, leadership, and culture. We invest in our teammates so they have the opportunities to grow in their professional and personal lives. These four goals all contribute to a better, stronger insight that delivers greater value to our clients, partners, teammates, and shareholders on our transformation to becoming an industry-recognized solutions integrator. Our values of hunger, heart, and harmony are the foundation for the purpose-driven culture of our company. We believe that technology is our greatest resource for doing good, magnifying noble causes with an incomparable ability to scale, automate, innovate, and communicate. We remain committed to living up to the principles of protecting human rights, fair legal practices, anti-corruption, and sustainability. We recently posted our annual corporate citizens report. citizenship report. You will gain a better understanding of Insight's culture by reading the stories about our teammates living the best versions of themselves and making a positive impact on their communities. I am so proud to be part of a team that embraces servant leadership and the diversity of our global community. Now, I will turn the call back over to Glynis to review our quarter and our full year financial results. Thank you, Joyce. In the second year of the pandemic, we continued to focus on helping our clients forecast their needs and ensure that they were in the right supply as it became available. This led to rapid bookings and backlog levels exiting 2021. For 2022, industry analysts expect low single-digit growth in hardware. However, in our first quarter, we're seeing hardware bookings in North America improve double digits year-over-year compared to the first quarter of 2021. Also, we exited the fourth quarter of 2021 with elevated backlog, primarily in North America. We expect that this will benefit the first half of 2022. Moving on to slides 11 through 14 for our consolidated results, our net sales in the fourth quarter were $2.6 billion, up 12% in constant currency and also in U.S. dollars, compared to the fourth quarter of 2020. This represented record net sales for Insight. Gross profit of $385 million increased 12% year-over-year, and gross margin was 15%. SG&A expenses were up 12% year-over-year in constant currency and up 13% in U.S. dollars. As a percentage of net sales, adjusted SG&A was 11%, consistent with prior year, and as a percentage of net sales, SG&A on a gap basis was 11.3%, also consistent with prior year. Adjusted earnings from operations was $103 million, up 12% year-over-year, also up 12% on a gap basis to 93%. An adjusted diluted earnings per share was $2.03, up 15%, and $1.69 per share on a GAAP basis, an increase of 13%. On an annual basis for 2021, as Joyce mentioned, we set company records for net sales, gross profit, adjusted earnings from operations, and adjusted diluted earnings per share. Annual net sales of $9.4 billion were up 13% year-over-year. We maintained focus on leading with services, which also grew 13% year-over-year. Our gross profit of $1.4 billion was up 11% from 2020. Gross margin for the full year was 15.3% compared to last year of 15.6%. Our services gross profit was 49% of consolidated gross profit compared to 48% in 2020. Cloud gross profit in 2021 grew 21%, driven by SaaS and infrastructure as a service, with a combined gross profit growth rate of 35% year-over-year. SG&A expenses were up 7% year-over-year in constant currency and 10% in U.S. dollars. As a percentage of net sales, adjusted SG&A was 11.5%, down from 11.7% in 2020 and below our guidance of 11.7% for 2021. As a result of net sales, net SG&A on a GAAP basis was down 11.8%, down 30 basis points year-over-year. Adjusted earnings from operations were $362 million, up 12% year-over-year, compared to $322 million and a 22% increase in rents from operations on a GAAP basis. And adjusted diluted earnings per share was $7.10, up 15%, versus $5.95 per share on a GAAP basis, an increase of 22%. Our cloud growth profit results for the quarter and full year were 17% and 18% of consolidated gross profit, respectively. This compares to 16% and 17% in the prior year, respectively. We're presenting our cloud results exclusive of a tier two or cloud service provider net sales, which were previously included in our stated cloud results. For more comparability, we're reporting cloud service provider net sales as part of our software product category. This aligns with our historical and ongoing U.S. GAAP financial reporting and increases the focus on the faster-growing cloud-related elements. Moving on to the results of each of our operating segments, and starting with North America operating results on slide 15, fourth quarter net sales were $2.1 billion, a record for insight up 13% year-over-year, driven by a 19% increase in hardware net sales. Growth profit in North America in the fourth quarter increased 13% year-over-year, and growth margin of 14.7% was relatively flat year-to-year. This was driven by the mix of products and services in the quarter. As I mentioned, we exited the year with elevated backlogs in the business. Selling and administrative expenses increased 14% year-over-year, driven by higher personnel and variable compensation costs resulting from higher net sales. Adjusted earnings from operations grew 9% year-over-year to $85 million. Gap earnings from operations grew 8% year-over-year to $77 million. Moving on to the May on slide 16, net sales in the fourth quarter grew 7% in constant currency. Growth profit also increased 10% in constant currency, faster than net sales, primarily due to an increase in higher margin services, partially offset by a net decrease in product margins. Adjusted earnings from operations were 13.2%, up 27% in constant currency. Gap earnings from operations grew 35% year-over-year to $12.5 million. Now I want to APAC on slide 17. Next sales of $54 million and gross profit of $14 million in the fourth quarter increased 19% and 22% respectively year-over-year in constant currency, primarily due to higher sales across all categories in the region. This led to adjusted earnings from operations of $14.7 million in the quarter. GAAP earnings from operations was $4.4 million. Moving on to our tax rates, our effective tax rate in 2021 was 20.0% compared to 24.4% in 2020. The net increase in our rate was a result of tax benefits made available by the CARES Act in 2020, partially offset by increased tax credit. Turning to the details of our 2021 cash flow performance on slide 18, our operations generated $164 million of cash in 2021 compared to $356 million of cash in 2020. As we have highlighted previously, our cash conversion cycle is inverted, meaning we pay our partners on terms shorter than we receive payments from our clients. This allows us to drive more cash flow when hardware sales decline, while in periods of growth, more cash is used in our operations. In 2021, hardware growth recovered significantly, returning our business to a more historical range of annual cash flow generation. In the fourth quarter, our cash conversion cycle is 30 days, flat year-over-year. Factors in our cash conversion cycle included the following. Strategic inventory procurement in support of client projects, partially offset by improved DSO and deferral of payments to certain vendors. In 2021, We invested $52 million in capital expenditures, mainly related to facility and technology investment. We also received $31 million in proceeds from the sale of real estate assets. Lastly, we spent $50 million to repurchase shares of our common stock in Q2 of 2021. We continue to have $75 million remaining under our share repurchase authorization. As of December 31st, 2021, We had almost all of our $1.2 billion capacity available under our ABL facility, and we have ample capacity to fund future growth. At the end of the year, we had a cash balance of $104 million, of which $84 million was residents and our foreign subsidiaries. We had $362 million of outstanding debt, including our senior convertible note at the end of the quarter, compared to prior cash balance of $182 million, and total debt of $439 million. Moving on to liquidity on slide nine, we acted as a quarter with a leveraged position at less than 1.0 times debt to cash flows or EBITDA, which is well within our level of comfort. 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 December 31st, We're at 4.1 times the minimum requirement of 1.0 times, and we're confident we can support our capital requirements and liquidity needs. For the full year of 2022 guidance on slide 20, we expect to deliver mid-single digit net sales growth. We expect adjusted diluted earnings per share for the full year of 2022 to be between $7.65 and $7.85. This outlook assumes interest expense between $30 to $35 million, an effective tax rate of 25% to 26% for the full year of 2022, capital expenditures of $75 to $80 million, including final completion of our new corporate headquarters, and an average share count for the full year of 35.6 million shares. This outlook excludes acquisition-related and tangible organization expense of approximately $31 million, and assumes no acquisition-related reference and restructuring expenses. I will now turn the call back to Joyce. Thank you, Glynis. In closing, I want to thank our teammates again for their hunger, heart, and harmony. I want to thank our clients for trusting Insight to help them transform their businesses. And I also want to thank our partners for their collaboration and support in building innovative solutions that deliver differentiated results. Insight had an incredible year, and there is so much more opportunity. This concludes my comments, and we will now open the line for your questions.

At this time, if you would like to ask a question, please press star 1 on your telephone keypad. Again, that's star 1 to ask a question. To withdraw your question, press the pound key. We will pause for just a moment to compile the Q&A roster. So our first question is from the line of Matt Sheeran with the steeple.