Insight Enterprises, Inc.

and created a single source of truth. Our client estimates this project will deliver over $10 million of benefits over two years. And because of the success of this project, we remain highly engaged with the client and have recently been retained to implement advanced analytics and AI to deliver even more benefits. It takes a world-class team to deliver these solutions to our clients, and those teammates need an environment which allows them to do their best work. I'm thrilled that we recently welcomed our teammates to our stunning new headquarters in Chandler, Arizona. The building was based on design principles that drive collaboration, problem solving, and creativity. We believe the space will inspire our teammates to design and deliver the best solutions for our clients. We are particularly proud of the new Innovation Center, which provides an interactive experience to help clients visualize exactly how our solutions can address their most ambitious challenges as they work through their digital transformation journey. And consistent with Insight's focus on sustainability, our headquarters will be Gold LEED certified, including key elements such as window sensors that automatically open and close based on UV intensity, solar panels, which provide 80% of the facility's energy consumption during peak periods, and over 800 indoor trees and plants to improve air quality. In addition to moving into our new headquarters, we also celebrated some key recognitions in the quarter. We received over 13 partner awards from Microsoft that spanned cloud, security, modern workplace, and a manufacturing vertical industry recognition. We are particularly proud of our global VP of Security and CISO, Jason Radar, who was recently honored with Microsoft Security Excellence Award as the Security Changemaker of the Year. Jason was instrumental in developing Insight's end-to-end security consulting portfolio, and under his leadership, our cybersecurity team has become a trusted advisor to help our clients navigate complexity in security and compliance. We were also named Intel's 2022 U.S. Partner of the Year for Innovation and were awarded Cradle Point's IoT Partner of the Year. Lastly, we were recognized by Fast Company for their World Changing Ideas Award, which honors companies that support positive social innovation. These recognitions cannot be achieved without the dedication of our Insight teammates. So before I hand the call back over to Glenna, I'd like to thank our Insight teammates, clients and partners around the world and reiterate how pleased I am with our first half results. I recognize that we are moving into uncertain times economically and that the environment is rapidly evolving. But as my grandmother used to say, when the going gets tough, the tough get going. and we are going. We are confident in the value of our solutions to our clients and resolute about our long-term fundamentals of our business. We are uniquely positioned in a very large market with significant expertise across hardware, software, and services, and we'll continue to invest in our solutions business to realize this opportunity. I will now turn the call over to Glenys.

Thank you, Joyce. As Joyce mentioned, we are very pleased with our record results for the second quarter. We had strong performance in both products and services, and our North America business had an outstanding quarter. As we had expected, hardware, and particularly devices, were very strong, and we saw acceleration in services growth. All of our operating results can be found in our earnings presentation, and I'll start on slide eight. For our consolidated results, net sales in the second quarter were $2.7 billion, up 26% in constant currency, and up 23% in U.S. dollars compared to the second quarter of 2021. Product net sales in the second quarter grew 24% year-over-year, primarily driven by hardware net sales. Services net sales in the second quarter grew 16% year-over-year, with insight-delivered or core services growth of 15% and partner and cloud services growth of 17%. Gross profit of $438 million increased 21% in constant currency and 19% in U.S. dollars over prior year. Gross margin was 16%, a decrease of 40 basis points compared to prior year. Product gross profit increased 23% year-over-year, driven by growth in sales of devices. Services gross profit increased 16% year-over-year, driven by growth in InsightCore services and partner and cloud services. Our cloud gross profit for the trailing 12 months ended June 30th with 19% of consolidated gross profit, up 50 basis points from prior year. And our services gross profit was 48% of total gross profit, also on a trailing 12-month basis. SG&A expenses for the second quarter were up 12% year-over-year in constant currency and up 10% in U.S. dollars. As a percentage of net sales, both adjusted SG&A and SG&A on the gap basis were 11% versus 12% in the prior year quarter. Adjusted earnings from operations for the second quarter were $142 million, up 49% year-over-year in constant currency and up 45% in U.S. dollars. On a gap basis, earnings from operations increased 46% to $130 million. For the second quarter, adjusted value-added earnings per share was $2.78 up 50% in constant currency and 46% in U.S. dollars a year over year. On a gap basis, diluted earnings per share was $2.42, an increase of 53%. Before I discuss the performance of our operating segments, I'd like to provide a little more color on backlog in Q2 as well as our expectations for the rest of 2022. While total hardware backlog remains at elevated levels going into Q3, With the continued improvements in the device supply chain, our device backlog started to decline in Q2. We expect our current device backlog will flush in the second half of 2022. On the infrastructure side, backlog continues to build in Q2. However, the infrastructure supply chain is also starting to improve, and we expect to see backlog start to decline in Q3 and estimate that it will be sometime in 2023 before all that backlog clears. Moving on now to the results of our operating segments and starting with North America. North America had an outstanding second quarter with record net sales of 2.2 billion, up 28% year-over-year. Product net sales grew 29% year-over-year, primarily driven by a 33% increase in hardware net sales. While we expected double-digit growth in hardware and primarily related to devices, this was higher than expected. As we have discussed over the year, we believe device growth will slow in the second half of 2022. However, we expect infrastructure growth and accompanying services will accelerate as that product becomes more available. Services net sales grew 20% year over year, primarily driven by Insight core services and higher sales of software assurance. Growth profit in North America in the second quarter increased 26% year over year, and gross margin at 15.6% was down 20 basis points, primarily driven by changes in products and services mix. Product gross profit increased 28% year-over-year. Services gross profit increased 23% year-over-year, primarily driven by Insight core services and cloud solutions. Selling administrative expenses increased 14% year-over-year, driven by higher personnel and variable compensation costs, primarily from higher gross profit, and our investment in solutions and services teammates. Adjusted earnings from operations grew 60% year-over-year to $116 million. Gap earnings from operations grew 63% year-over-year to $104 million. Moving on to EMEA. Net sales in the second quarter grew 14% in constant currency, driven by product net sales, specifically software. Gross profit grew 6% in constant currency, slower than net sales due to a decline in software agency fees and a decline in margin on inside core services. Adjusted earnings from operations were $19 million, up 4% in constant currency. Gas earnings from operations declined 7% year-over-year to $18 million. On to APAC. Net sales of $70 million in the second quarter increased to 41% year-over-year in constant currency driven by software, hardware, inside core services, and cloud solution sales. Gross profit of $18 million increased 35% year-over-year in constant currency, primarily due to higher profit sales and services and higher volume of cloud solutions. This led to adjusted earnings from operations of $7.4 million in the quarter, up 52% in constant currency. Gas earnings from operations grew 46% year-over-year to $7 million. Moving on to our tax rate, our effective tax rate for the second quarter of 2022 was 25.6%, relatively flat compared to 25.4% in 2021. Turning to the details of our year-to-date 2022 cash flow performance, in the first six months of 2022, our operations used $442 million of cash compared to $5 million of cash generated in the same period in 2021. 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 growth decelerates, while in periods of hardware growth, more cash is used in our operation. In the first half of 2022, the decrease in cash flow from operations activities was primarily driven by growth in hardware net sales, changes in partner mix, including increased volume with distributors with early payment terms, and securing inventory for future client projects. In the second quarter of 2022, our cash conversion cycle was 48 days, up 15 days from the second quarter of 2021 as a result of increased volumes with distributors, resulting in lower DPO that I had just discussed, an increase in DIO as a result of increased inventory, including inventory for future client projects, partially offset by a decrease in DSO. In 2022, we invested $47 million in Catholic expenditures related to facility and technology investments. As a reminder, we received $27 million in proceeds from the sale of real estate assets in the prior year. We also used $68 million net of cash and cash equivalents to purchase HNU that Joyce discussed earlier. We did not have any acquisitions in the prior year. We continue to have $75 million outstanding on their current share repurchase authorization. we plan to repurchase approximately $25 million of outstanding shares in the second half of 2022 under this current authorization. At the end of the second quarter, we had a cash balance of $138 million, of which $150 million was resident in our foreign subsidiaries. We had $1.1 billion of outstanding debt, including our senior convertible notes at the end of the quarter, compared to a prior year quarter and cash balance of $108 million and total debt of $484 million. In the second quarter, our convertible notes continue to exceed the market price trigger of $88.82 and remain convertible at the option of the holders, and the principal amount will continue to be classified as current. Given the market value of the convertible notes, we do not anticipate that note holders would convert their notes in the near term. As we think about liquidity, we're exiting the quarter with a leverage position at less than 2.3 times debt to cash flows, or EBITDA, 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're at 3.8 times the minimum requirement of 1.0 times, and we're confident we can support our capital requirements and liquidity needs. On July 22nd, we amended and extended our ABL facility and increased the capacity from $1.2 billion to $1.8 billion with comparable or better term. As of today, we have approximately $800 million of our $1.8 billion capacity available under our ABL facility, and we have ample capacity to fund future growth. As you think about our guidance for the first full year of 2022, We expect to deliver low double-digit net sales growth. We expect adjusted diluted earnings per share for the full year of 2022 to be between $8.55 and $8.75. This outlook assumes interest expense between $30 to $35 million, an effective tax rate of 25 to 26% for the full year 2022, Capital expenditures of $65 to $70 million, including completion of our new corporate headquarters, and an average share count for the full year of 35.4 million shares after our planned repurchase of $25 million of shares. This outlook excludes acquisition-related intangible expense of approximately $34 million, assumes no acquisition-related or severance and restructuring and transformation expense, and assumes no significant change in our debt instruments. I will now turn the call back to Joyce.

Thanks, Glynis.

In closing, I'd like 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 journeys, our partners for their continued collaboration and support in delivering innovative solutions to our clients. Insight is off to a great start in 2022. and we are optimistic about our ability to expand our solutions business and deliver even more value to our clients as they modernize and transform. This concludes my comments, and we will now open the line for your questions.

As a reminder, if you'd like to ask a question today, that's star followed by one on your telephone keypad now. The first question today comes from Joe Cardoso from JPMorgan. Joe, please go ahead.

Hey, good morning, everyone, and thanks for the question. You know, my first question, if I take a look at the midpoint of your four-year guide, it appears that you're baking in at the acceleration heading into the second half versus the first half from both an implied top line and profits perspective. Can you maybe just dive into that a bit and discuss what are the primary drivers of the slowdown you're baking into the guide, particularly given the solid momentum you've seen in the first half?

Thanks, Joe. So what we said at the start of the year was that we had envisioned that we were going to be stronger in the first half of the year versus the second half of the year. primarily based on our performance in the second half of 2021. So what we experienced in the first half of 2022, our growth levels that were kind of flowing through from 2021, and we had made an assumption with regard to how the year was going to play out, and we had lower growth in the second half of the year. As we have gone through, it has played out as we anticipated, meaning that the first quarter had strong hardware growth, relative to a low compare in the first quarter of 2021. In Q3 of 2021, growth was 36% in North America, just as an example. That was not something that we envisioned as we go on a year-over-year basis that we would continue to grow at the same pace. So our assumption is that relative to the compare that we have in the second half of 2021, we assume that our growth in 2022, second half, is going to be more muted. For the full year, we're still growing at over 400 or 500 basis points ahead of the market. So I think it's, I wouldn't say that it's necessarily a slowdown. It's just relative to our specific compares that we have to accommodate going into 2022. I will say that as you go through there, what we had talked about also was that we would have higher growth margins in the second half of 2022. That's still the case, primarily because devices will be a floor percentage of total hardware in the second half. We anticipate that infrastructure, that is the supply chains, not necessarily starting to ease, but the timelines are not as long as they used to be. We're going to get deliveries of infrastructure. We're going to be able to do services projects associated with infrastructure, and that's going to drive higher margins in the second half of the year relative to the first half of the year.

Got it. And then I guess on my second question here, what are you seeing around demand for managing professional services? The reason I'm asking is everyone's privileged in seeing new stories around enterprises planning to slow down hiring. So just curious if that's kind of transitioning or translating into a tailwind for your customers as they look to increasingly leverage Insight due to that dynamic. Thanks.

Yeah, thank you, Joe. So yes, for sure, demand for digital transformation services, professional services, managed services is really, really strong. I think clients are looking to partners like Insight to augment their own skills and capacity because digital transformation is essential to their own performance. And this is a bit exacerbated by a constrained labor market, especially around specific skills. And so there's a lot of increased interest in leveraging those services from Insight. And I would also say there's also a lot more interest in automation to try to figure out how to design labor content out of processes.

Thanks. Appreciate all the color, guys.

The next question comes from Matt Sheeran of Stifle. Matt, please go ahead.

Yes, thank you, and good morning. Just following up on the last question regarding the revenue guide for the rest of the year, so it looks like you'll be down sequentially. Is that primarily a function of that PC refresh and the backlog getting worked down? And if you look at the infrastructure products, the solutions products, if you will, do you expect that to be up in the second half versus the first half?

Okay, yes. So it is a sequential decline in hardware. It's appropriated as growth over prior year. This particular hardware quarter was very, very strong. Very, very strong also around devices as we talked about. Our assumption is that devices are not as strong in the second half, partly because the backlog has started to flush and while we're getting new bookings coming in, it's not at the same pace that we had in the first half of the year or the second half of last year. So we anticipate that, yes, it is going to be a sequential decline, specifically related to devices. We do see an increase, ultimately, in infrastructure and projects associated with infrastructure in the second half of the year, which is higher margins, which would be higher margins.

Got it. Yeah. And then just for backing into the gross margin, after that very strong 16%, It looks like you'll be up certainly year over year, but sequentially maybe not at those levels. And are there any drivers there? Were there some one-offs maybe on the services side that boosted that gross margin in June that may not repeat itself?

Oh, so the gross margin in our second quarter is primarily driven by Microsoft and the fact that June is Microsoft year-end. So June is always, sorry, the second quarter is typically our strongest quarter and we saw tremendous cloud growth associated with that. A cloud as a percentage of total GP was 16% up 50 basis points as we talked about. So I wouldn't anticipate that the rest of the year would be at the 16% level because that June, the second quarter is typically our highest quarter. However, I think that we will be recovering some of the gross margin that we gave up in the first half of the year when we had more devices in the mix. And hence, our gross margin in the first two quarters was lower than prior year. We're going to be higher gross margin going into the second half of the year. Net-net for the year, we will be up slightly at the gross margin line.

Got it. Okay. That's helpful. And then in terms of the region's It looked like North America hardware sales were very strong again, but not so strong in EMEA where you were down. Could you just maybe give us some color on what you're seeing in terms of macro? Is the refresh cycle sort of played out there? Is there more cautiousness from customers?

Yeah, I would say that hardware growth in North America was really strong again. That's several quarters in a row we've seen incredible hardware growth. And the mix of our business is stronger in hardware in North America than it is in EMEA. EMEA's mix is much more software and services oriented. We also have a fairly significant public sector business in In EMEA and in that business, the hardware was down. So that is consistent with what you just recognized. But I would say overall, we're really pleased with our EMEA performance and constant currency for sure. And as I said, it's primarily driven by software and services.

OK. And just my last question regarding gross margin. On the pricing side, we're seeing ASPs of the products that you sell go up, and that's typically a pass-through. And it looks like price competition is less severe now, given strong demand and the constraints. So as things like PG Supply eases, are you expecting a return of more price competition against the margin pressure?

Not particularly. I mean, we generally participate in the higher sort of ASP part of the market because most of our business is custom built. So we've been very successful at passing along those cost increases to our clients without objection, and we would expect to continue to do that.

Okay. Thank you very much.

Thanks, Matt.

The next question comes from Catherine Hundley from Raymond James. Catherine, please go ahead.

Hey, this is Catherine on for Adam today. Thank you so much for taking our question.

Thank you. Thanks for being here.

First, Joyce, could you touch on the demand environment for PCs? I know you talked a little bit about the supply environment and how that's alleviating. But what does PC demand look like across large enterprises and small businesses?

Yeah, we haven't seen significant, I mean, so far we haven't seen significant declines in demand. So as Linus mentioned, we have very, very strong compares, especially on the device side for the back half of this year and the early part, back half of 2022 and the early part of 2022 was also very, very strong. And we are starting to see slower growth rates on those compares. But so far, we haven't seen significant declines. Now, we are looking at that very carefully. We are flushing a lot of inventory and devices, as Glenis noted. But still, we see reasonable demand. If you look at all the forecasts and The chip providers and the OEMs are all forecasting a unit decline. Again, that is, since we don't participate in the consumer space, that really sort of started there. We are being cautious about it, so we are anticipating that devices will slow and potentially decline near the end of the year, but I would say so far we're basically holding pretty flat to last year. okay perfect thank you so much for all that color and then could you just touch a little bit on the hiring environment and do you expect to incrementally hire from here given that you just hired 700 technical experts in the first half we are going to continue hiring absolutely especially in the areas of technical experts and and specific skills around data cloud ai security so we are focused on using this opportunity of potentially an uncertain market to acquire more talent. And we're actually looking at also continuing our M&A strategy.

Awesome. Thank you.

The next question comes from Anthony Libidzinski from Sedoti. Anthony, please go ahead.

Yes, good morning, and thank you for taking the questions. So first, I guess, you know, Hey, good morning. So typically in your 10Qs, you guys break out the client group revenues and so on. So as we look at enterprise versus public sector versus SMB, are you seeing any notable changes as far as demand levels? Just curious to get your take on that.

So I would say generally at the sort of large corporate and enterprise space, we are seeing a little more deliberate thought process and a slightly slower commitment cycle to large projects. But so far, demand is holding very strong. We are seeing our clients take a few extra a week or two to actually commit to a project. The mid-market space is really quite strong. Our commercial space is really quite strong. So we haven't seen significant slowdown there at all. And I would say from a top-line point of view and an outlook point of view, we expect corporate enterprise to stay strong. Although, again, some pretty tough comparisons, Linus noted, in the back half of the year, especially around devices.

And so, Anthony, in Q2, all segments performed well.

Got it. Okay. Understood. Okay. And then, you know, if we were to take the midpoint of your EPS guidance now, you know, how should we think about cash from operations? Any sort of ballpark estimate as to how that could shake out?

that we're going to be, that hardware is going to decline sequentially and that there's going to be slower growth in hardware on the second half would say that we're going to start generating cash as the business kind of, as that deceleration occurs. So we would envision that as we go through the rest of the year that you would see cash flow from operations declining from the negative 442 that it is today getting towards positive territory. I don't have enough visibility today for the performance of hardware in Q4 for me to really be able to give you a firm number as to where we think it will end up, but you should see the cash flow from operations start to decline as we go through the rest of this year.

I understand there's a lot of moving pieces there.

Sorry, sorry, increase. Sorry, I said decline, but it's going to increase. The negative will get lower.

Right, right, I understand, yeah.

Yeah.

Gotcha. Okay. All right. And then lastly, you know, as far as the Heinz software acquisition, I know it was relatively small, but can you help us just understand how we should think about on an annualized basis, you know, revenue or contribution from that acquisition?

No impact. We're excited about the incremental capacity and the additional teammates. That's going to help us serve our customers better, but it's not a meaningful financial number.

Got it. Okay. All right. Well, thanks. Best of luck.

Thank you.

Thank you.

The next question is from Vincent Colicchio from Barrington Research. Vincent, please go ahead.

Yes, a question on the acquisition side. So is your pipeline meaningful? Could you remind us of your current priorities? And is there any change in terms of valuations in the market, any easing of multiples out there?

Yeah, so we do have a meaningful pipeline. We are focused on building our capacity and our skills in data, data and AI, cloud, and security. And we always are looking for opportunities to increase their scale because we do believe that scale matters. So far, I would say the expectations of the sellers have not moderated in terms of multiples in valuation, but we anticipate that they will over the next six months, and we think that's going to be an opportunity.

Thanks for that. And one last one. I think I know the answer, but I'll ask anyway. You know, wage inflation has been roaring, especially in areas of highly skilled folks. Any easing whatsoever or sort of status quo with last quarter?

It kind of depends on the type of skills, really. So in some of those areas that I just mentioned, those skills are pretty constrained and in high demand. We have seen some moderation generally in terms of wage inflation requirements or requests. But in some of those hot areas like data and AI, we haven't seen that moderate yet.

OK. Thanks for answering my questions. Next quarter.

Thank you.

We have no further questions at this time, so this concludes today's Q&A session and thus concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.