Insight Enterprises, Inc.

Hello, and welcome to Insight Enterprise's second quarter 2024 operating results. My name is Kiki, and I will be your call operator today. During the presentation, you will have the opportunity to ask a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I will now hand you over to your host, James Mogado, Senior Vice President, Finance and CFO of Insights North America, to begin. James, please go ahead.

Welcome, everyone, and thank you for joining the Insight Enterprises earnings conference call. Today we will be discussing the company's operating results for the quarter ended June 30th, 2024. I'm James Morgado, Senior Vice President of Finance and CFO of Insight North America. Joining me is Joyce Mullen, President and Chief Executive Officer, and Glenys Bryan, 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 8K, you'll find it on our website at insight.com under the investor relations section. Today's call, including the question and answer period, is being webcast live and can also be accessed via the investor relations page of our website at insight.com. An archived copy of the conference call will be available approximately two hours after completion of the call and will remain on our website for a limited time. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, August 1, 2024. 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 the non-GAAP financial measures as we discuss the second quarter 2024 financial results. When discussing non-GAAP measures, we will refer to them as adjusted. You will find a reconciliation of these adjusted measures to our actual GAAP results included in both the press release and the accompanying slide presentation issued earlier today. Please note that all growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. Also, Unless highlighted as constant currency, all amounts and growth rates discussed are in US dollar terms. As a reminder, all forward-looking statements that are made during this conference call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in today's press release and in greater detail in our most recently filed periodic reports and subsequent filings with the SEC. All forward-looking statements are made as of the date of this call and except as required by law, we undertake no obligation to update any forward-looking 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'll begin on slide four. Joyce?

Thank you very much, James. Good morning, everyone, and thank you for joining us today. In Q2, we delivered double-digit cloud and core services gross profit growth and expanded gross margin and adjusted EBITDA margin, despite a choppy demand environment. Our strategy to focus on solutions for our clients, including cloud, services, and the fastest growing areas of the market, has delivered improved economics to our shareholders. In addition, the profitability initiatives and the operating expense actions we have taken over the past several quarters have strengthened our foundation and improved resilience of our business. All of these elements are critical to our strategy to become the leading solutions integrator. We have also continued to invest in sales and technical resources as well as new growth areas, such as Gen AI solutions, which will be critical as demand improves. Here are a few highlights from Q2. Gross profit grew 5% to $453 million. Gross margin expanded by 260 basis points to 21%. Cloud gross profit increased 21% to $139 million. Insight Core Services gross profit increased 12% to $81 million. Additionally, adjusted EBITDA margin expanded by 60 basis points to 6.5%, a Q2 record. And adjusted EBITDA increased 3% to $141 million. We achieved these results despite an uncertain macro environment and lower than expected demand, especially in our product business. We also had higher interest expense related to acquisitions, resulting in a decline in adjusted saluted EPS of 4% in the quarter. Overall, the variability and seasonality of our business is changing as we focus on selling more services and cloud-centric solutions and as the industry shifts towards consumption-based models. Our first half results are more indicative of our execution and the progress we are making towards our solutions integrator ambition. Year to date through Q2 compared to the prior year period, gross profit grew 8% to $894 million. Gross margin expanded by 210 basis points to 19.7%. Cloud gross profit increased 26% to $256 million. Insight core services gross profit increased 18% to $156 million. Adjusted EBITDA margin expanded by 90 basis points to 6%. Adjusted EBITDA increased 15% to $274 million, and adjusted diluted EPS was up 11%. As a reminder, our ambition is to become the leading solutions integrator by integrating hardware, software, and services to drive business outcomes for our clients. They need a partner they can trust to navigate these new technologies and the infrastructure and workplace requirements to help them digitally transform. We are executing against our strategy and making good progress on our initiative. As a timely example of this, during the global IT outage two weeks ago, unrelated to Insight, our team swiftly engaged with impacted clients and implemented recovery plans to minimize downtime and restore operations efficiently. Our team's expertise and quick response were instrumental in guiding our clients through the outage with minimal disruption to their business operations. Our ability to deliver impactful solutions to our clients relies on our proficiency across diverse technology domains. We have enhanced our services capabilities by acquiring terrific companies with proven expertise in the fastest growing areas of the market, while simultaneously creating new cross-selling opportunities between our organic insight business and our acquired companies. Here are some examples of how InfoCenter and Amdaris bolster our capabilities to deliver solutions to our clients. A major payment processing company recently separated from its parent needed to build an entirely new IT infrastructure in months not years. As a newly independent company, our client needed to transition to their own instance of ServiceNow, a critical platform for IT service management. Insight's InfoCenter team first engaged with the client by using a proprietary set of specialized workshops. This led to a phased rollout across all areas of the ServiceNow platform and we are now planning to provide support through a managed service engagement. In the three months after acquiring InfoCenter, We're already deploying our ServiceNow expertise to traditional Insight customers to deliver comprehensive AI-powered solutions for complex transformations in the high-margin enterprise automation market. Here's an example of how Amdaras enhances our solutions capabilities in the EMEA region. Through our Amdaras acquisition, Insight has become an elite global implementation partner with Stripe. Stripe provides a fully integrated suite of financial and payments products for businesses of all sizes and processed over a trillion dollars in payments in 2023. Our Stripe certified implementation experts help businesses get the most out of Stripe's full product suite, including billing marketplaces and complex subscription models. This is an example of how we're positioned to handle complex integrations with custom backend systems. These examples demonstrate the effectiveness of our M&A strategy as we push to become the leading solutions integrator. In our continued commitment to building a diverse and inclusive team, we're proud to announce that Insight has been recognized for a fourth year in a row by Forbes as one of the America's best employers for diversity. On the partner front, Insight was proud to be recognized by Microsoft for our security solutions. Insight has demonstrated our robust security services, including a security operation center with 24-7 by 365 proactive hunting, monitoring, and response capabilities, all built on tight integrations with the Microsoft security platform. While we are executing against our strategy and making good progress on our initiatives, our perspective of the market and the operating environment for the second half of the year remains mixed. We achieved strong Q1 results, and we are on track through the first half. Demand for devices has improved, but not to the levels we anticipated entering the year. The drivers for refresh remain the same, though some clients have paused as they manage through the current economic environment and assess new technologies, particularly AI PCs, as part of their future purchases. We expect demand for devices to improve in the second half. Infrastructure demand was down in the first half as our clients deployed products acquired in 2023. In July, we saw some improvement in demand and expect that the second half will be stronger than the first half of the year. We have enhanced our global services capabilities through our recent acquisitions and we're seeing increased cross-sell opportunities. And we will continue to prudently manage operating expenses and gross margin with our pricing and profitability initiatives. I'll now turn the call over to Glynis to share key details of our financial and operating performance in Q2, as well as our outlook for 2024. Glynis?

Thank you, Joyce. In Q2, net revenue was $2.2 billion, a decrease of 8% in US dollars and also in constant currency. The decrease was driven by hardware, particularly infrastructure, and on-prem software, partially offset by an increase in cloud and inside core services. In Q2, devices were flat and infrastructure was down double digits year to year. Sequentially, Devices increased modestly and infrastructure declined slightly. We continue to anticipate a modest second half improvement in devices, and we started to see green shoots in infrastructure demand in July and expect continued improvement throughout the year. Growth profit increased 5%, reflecting strong cloud and insight core services growth, partially offset by hardware decline. Gross margin was 21%, an increase of 260 basis points, and reflects a higher mix of cloud and Insight Core services. In addition, our profitability and pricing initiatives also contributed to higher hardware and services gross margin. Insight Core services gross profit was $81 million, an increase of 12%, and reflects the benefit of our acquisition. Cloud gross profit was $139 million, an increase of 21%, reflecting higher growth in Infrastructure as a Service and SAP. Adjusted SG&A grew 6% primarily due to acquisitions. Organic adjusted SG&A is down year to year based on the operating expense actions we took last year as we continue to prudently manage spending in the current environment. This resulted in adjusted EBITDA margin expanding 60 basis points to 6.5% and adjusted valued earnings per share were $2.46, down 4% in U.S. dollars and also in constant currency. The decline was due to an increase in interest expense from higher debt primarily related to the recent acquisition. Our most recent acquisitions were structured to include earnouts to share additional value with the sellers in the case of exceptional performance. These earnouts were measured at fair value at the time of the acquisition and recorded at much lower amounts than the face value of the target earnouts. The fair value is re-measured each quarter and any changes after the acquisition date are recognized as a gain or loss and included in earnings from operations. Gains are recognized for lower projected performance against earnout targets, while losses indicate higher than expected performance. In Q2, We recognized a gain related to the earn-outs of $25 million, which was excluded from our adjusted results. This gain reflects the lower projected performance compared to the earn-out targets for SADA and Amdaras. While we have determined that the earn-outs for exceptional performance will not be achieved, we are very comfortable with the total capital outweigh for these deals. We still expect that these deals will be accretive to our performance and will also deliver strong cash flow. Multi-cloud capability continues to be important to our solutions integrator strategy, and SADA is a key component as a recognized award-winning Google Cloud partner. GCP is typically contracted as a multi-year contract that ranges from three to five years. On the U.S. GAAP, revenue is recognized upfront for the full term of the contract and can therefore be lumpy and difficult to forecast. On the other hand, utilization or consumption of the cloud service by our GCP clients is much more predictable, occurs monthly, and flows through operating cash flow. SADA has and continues to demonstrate strong operating cash flows based on this consumption dynamic. To highlight the value of these cash flows, the contract asset value as of June 30th is $209 million with contracts that typically range from three to five years. This can be used as a proxy for how the service will be consumed over the average contract life. Our valuation of SADA was based on the cash economics of SADA's consumption business model. SADA's U.S. GAAP performance will be below our original expectations due to a slower start to the sales cycle in the first half as we aligned to Google's updated priorities. We're focusing our attention on expanding services and net new contracts in the mid-market with a more targeted sales motion, and we look forward to growing our partnership. Moving on to cash flow, in the quarter, we generated $46 million of cash flow from operations compared to $28 million in Q2 of 2023. As a reminder, Q1 cash flow from operations included favorable timing of client receipts versus partner payments that normalized in Q2. So the first half of 2024, we have generated $293 million in cash flow from operations compared to $188 million in the first half of 2023. We expect that cash flow from operations for 2024 will be at the higher end of our typical $300 to $400 million range. And to update you on our share repurchase program, in the first half of 2024, we have repurchased approximately 187,000 shares for a total cost of $35 million. We have approximately $165 million remaining under our current stock repurchase program, which we plan to execute over the next two months. Our adjusted return on invested capital for the trailing 12 months ended June 30, 2024, with 17%, compared to 15.6% a year ago. This demonstrates good progress towards our long-term goal. In the quarter, we raised $500 million aggregate principal from the sale of senior notes due in 2032. We have used the net proceeds to repay a portion of our ABL. We exited Q2 with long-term debt of $663 million including the new senior notes and $171 million outstanding under our ABL. Acquisitions are the primary drivers for the increase in debt of $325 million from Q2 of 2023. This was offset by improved operating cash flow performance. As of the end of Q2, we have access to the full $1.8 billion capacity under the ABL facility, of which $1.6 billion was available. We have ample liquidity to meet our needs. Our presentation shows our trailing 12-month performance through Q2 2024 relative to the metrics that we described in our investor day in October 2022. We believe we're on track to hit these targets by 2027 as demonstrated by strong starts from client growth profit growth of 28%, core services growth profit growth of 15%, adjusted EBITDA margin of 6.2%, adjusted ROIC of 17%, and adjusted free cash flow as a percentage of adjusted net income Based on our experience across the first two quarters, this is a very complex year. While many of our clients have been cautious about their spending decisions, we have seen an uptick in demand in our commercial segment, and that is typically the first segment to recover for us after a downturn. As we think about the remainder of the year, we have considered the following factors in our guidance. We anticipate cloud will remain strong. core services will improve despite continued elongated sales cycles. SADA had a negative impact on adjusted diluted EPS in the first half and we anticipate that they will be accretive in the second half as the business remains very back-end loaded. We expect hardware to improve modestly in the second half, primarily driven by device refreshes and improved infrastructure spending. We will continue to diligently manage our SG&A and expect SG&A to grow at a slower rate than gross profit. And we plan to utilize our remaining stock repurchase program of approximately $165 million. Considering these factors for the full year, our guidance is as follows. We expect to deliver gross profit growth in the low double digit range, and that our gross margin will be in the 19 to 20% range. And we continue to believe adjusted diluted earnings per share will be between $10.60 and $10.90. This guidance includes interest expense between $60 and $62 million, an effective tax rate of 26% for the full year, capital expenditures of $35 to $40 million, and an average share count for the full year of 35.1 million shares. This outlook Excludes acquisition-related and tangible organization expense of approximately $69 million. Assumes no acquisition-related or severance and restructuring and transformation expenses. And assumes no meaningful change in our debt instruments or the macroeconomic outlook. I will now turn the call back to Joyce.

Thanks, Glenn. In the first half of the year, we delivered positive results in many areas of the business. Cloud and Insight Core Services' gross profit grew double digits. We saw slight improvements in device demand. Gross margin expanded, reflecting a favorable mix of cloud and insight core services and benefits from our pricing and profitability initiatives. And we remained disciplined with SG&A management, all of which resulted in strong adjusted EBITDA margin performance. We are focused on integrating and driving revenue synergies with our recent acquisitions as they expand our expertise and capabilities across various geos and increase our relevance to our clients. While demand in our end markets remains choppy, we have made structural improvements and are focused on capturing profitable growth as demand returns. I want 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 journey, and our partners for their continued collaboration and support in delivering innovative solutions to our clients. This concludes my comments and we will now open the line for your questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. One barbarian to ask a question. Please ensure your device is unmuted locally. The first question is from Joseph Caruso from J.B. Morgan. The line is now open. Please go ahead.

Good morning and thanks for the question here. Um, so first one for me is just on the full year earnings guide, you know, quite impressive that you're reiterating here, despite what appears to be kind of a tougher operating environment, but I was hoping you can just dive into what's driving your conviction and reiterating at this point, particularly now that the guide implies a much steeper back half of the year. Like, what are you seeing as the key drivers in kind of that back half ramp here? And then I have a follow up. Thank you.

Sure. Okay. Thanks, Joe. Good question. Uh, so here's what I would say. In the second half of this year, we're going to have the benefit of a couple of things. One, we have the InfoCenter acquisition that's going to help us from an overall services gross margin, gross profit and gross margin perspective. Two, we have SADA in the second half of the year. We had talked in Q1 about trying to smooth the SADA business so that we'd have less seasonality across quarters. That did not. work out as we had anticipated in Q2, so SADA remains very back-end loaded. It was dilutive in the first half of the year, and it will be accretive. We expect it to be accretive in the second half of the year, and that is reflected in the guidance that we have. We also expect that cloud will continue to be strong. That has been a core tenet for us. We believe that services is going to continue to be strong, helped by the acquisitions, as well as our organic business. And we are starting to see some green shoots in devices for sure in terms of a sequential growth on year-over-year, starting to see some year-over-year improvement up single digits on a year-to-date basis. And we're also starting to see some green shoots in infrastructure. As we go through to Q4, the infrastructure comp becomes significantly easier for us ultimately. And we've had the benefit in our results to date, and we think we will continue to have the benefit in our results associated with the SG&A actions that we've taken over the past several months, starting in 2023. We're looking at the acquisitions that we've made and looking to do some consolidations of some functions where they can benefit from infrastructure we already have in place here at Insight. And we think that with that continued SG&A control, that will also help us in the second half of the year. And we are going to be buying back $165 million worth of our stock in the second half of the year.

Got it. That's very clear, Glenn.

Thanks for all of that.

Yeah, so maybe we can just touch on the cloud gross profit growth, like moderated the last two quarters in a row in terms of the total growth. underperforming a bit from what you outlined in the beginning of the year. And it sounds like some of this is being driven by the SATA underperformance a bit. Maybe you can just dive into that more. Like, what are you seeing there that is different from your expectations earlier than the year or even 90 days ago? And maybe just touch on, it sounded like you referenced some actions you're trying to take or planning to take to kind of return that performance back onto trajectory. Maybe you can just dive into both of those vectors. Thank you. Thanks for the questions.

Sure. So thanks, Joe. So, so cloud GP was grew double digits. As you know, we remain very confident in our organic cloud business. So in addition to Microsoft and Google, we also have a lot of other publishers in there, Cisco, Adobe citrus, et cetera, in the quarter network related cloud offerings were more challenged than we expected in the quarter. So anyway, that, that was a bit of a drag on the overall sort of traditional cloud public cloud business that you were thinking of. And then we do expect, as Vanessa mentioned, significant revenue synergies with SADA, and we expect improvement in SADA overall performance, which will help contribute to improved cloud performance in the back half. So we feel pretty good about our cloud business, but yeah, you're right, it was a little bit lighter than we expected in the quarter.

I think, Julia, just maybe add on to that is that, you know, a couple years ago, Microsoft was the behemoth in cloud. They dominated the cloud fees that we received. Now it turns out that some of the other partners, Citrix, Cisco, Adobe, et cetera, are also becoming bigger players in overall cloud. The sum of all those are still less than Microsoft combined, but they're still actually larger, and some of those underperformed in Q2.

Thanks for all the colors, Joyce and Glynis. Appreciate it.

Thank you. The next question is from Matt Shearing from Stifel. The line is now open. Please go ahead.

Yes, thank you. Good morning, everyone. Just another question regarding your guidance for the year, particularly top line, and I appreciate that you you don't give a top line guidance, but sort of backing into that based on gross profit and OpEx, it looks like you're gonna have to grow pretty significantly in the second half. As you said, comps are gonna get easier in Q4, but are you expecting the overall revenue to be up for the year? And it's not gonna be driven primarily by hardware.

We do expect that revenue will be up for the year. It's not going to be driven primarily by hardware. It's going to be driven by services and, well, sorry, probably thinking about GP. Let me rephrase my thinking. Hardware GP will grow in the year, not hugely, low, low, single digits. Hardware will grow. We will have some growth in services revenue. And we will have more so the GP contribution from services on the cloud. You know, we don't focus on the revenue side of the equation as much as we do on the GP side.

Okay. Okay. Thank you. And just looking at the North America results, your software sales were down pretty significantly sequentially in year over year. I know you commented on-prem software sales were weak, but could you give us more color with some of that netted down, and how should we think about that? Because I know that's a core part of your business.

So it's on-prem software, and on-prem software for us is not netted down. It is recorded growth with COGS and then ultimately GP. And in any given quarter, there are large deals that happen, or there could be large deals or multiple medium-sized deals that happened in the quarter that trigger that growth that we saw in Q1 versus what we're seeing in Q2, but there's nothing unique or different about Q2.

I would also add to that, Matt, you know, if you look at it for the half, we feel pretty confident in the numbers that we're seeing. If you remember last quarter, we had a pretty big software deal that impacted us. And we talked about that on the revenue line, not so much on the GP line, but overall on-prem software for the half is exactly where we expected it to be.

Got it. Oh, so some of that was regarding, relative to that big deal. Okay. And then, so do you expect that segment to grow in the second half then, year over year? Because the comps are going to get tough.

I don't know that I'm necessarily expecting.

My question just unclosed.

Just some growth. Revenue growth. You know, Matt, that segment is lumpy only because it depends on projects. The software that we sell in each particular quarter, we would envision that there would be some growth there consistent to what we've had for the half year.

Okay. And then regarding your international sales and NIAF, That was also down. One of your competitors was commenting about incremental weakness in the UK, and I know you have decent exposure there. So are you seeing any of that in Europe?

You know, I think that our UK business in particular did very well. We didn't see the same dynamic. We had MDARs, which helped them, of course, but organically that business also did well from a revenue GP and EFO perspective. Okay, thank you. So your question, I guess, for the future, as of right now, we're not, we didn't see weakness in the UK in particular in Q2, and we're not envisioning that for the rest of the year.

Okay, thank you.

Thank you. The next question is from Adam Tindall from Raymond James. The line is now open. Please go ahead.

okay thanks good morning um glenn if i just wanted to maybe take a step back and talk about the guidance um you know previously you were talking about mid to high teens growth in gross profit dollars for the year today with the update we're talking about low double digit growth and gross profit dollars for the year could you maybe unpack the buckets that drove that adjustment down And I think really getting to the heart of the question, with SADA, we had previously been told this was about a $200 million of annualized gross profit dollars when you initially acquired it, I believe. Correct me if I'm wrong. How would you update that now on your SADA assumption for fiscal 24?

OK, I think the number that you were quoting may be SADA's full year 2022 number, potentially. OK, here's what I would say. There is a portion of underperformance associated with ZADA that is impacting our overall gross margin growth. We still believe that ZADA has been a strategically valuable acquisition and will continue to be a strategically valuable acquisition in terms of our multi-cloud capability. ZADA underperformed our expectations in the first half, but we expected they were going to be diluted in the first half of the year and that they were going to be accretive in the second half of the year. We had a We had some plans with regard to trying to smooth out that seasonality, but those did not come to fruition. So, SADA does remain very back-end loaded, and as you remember, it's very back-end loaded to Q4. That is still the case going forward. We have reduced our expectations with regard to SADA for the remainder of this year, albeit still back-end loaded, and that is reflected in the guidance that we have provided. To date, we have grown GP at a slower rate than we had envisioned, but we have increased our gross margin more significantly than we had also envisioned. Hence, while we're bringing down our gross profit guide growth, we are increasing the gross margin associated with that from 19, which we said originally, to the 19 to 20% range.

And we also have changed our expectations within our guide because we've also changed our expectations on SG&As then. So I think originally we thought SG&A was going to grow faster than gross profit, and now it is growing more slowly than gross profit. And a big part of that is because we've right-sized the OPEX associated with SADA given the lower expectations.

Yeah, that makes sense. I guess I'm, you know, you are very prescriptive on the SADA contribution prior to this quarter. I think you started at 55 to 75 cents of EPS. Last quarter you updated to 55 to 65 cents of EPS. So it sounded like you had a very detailed thinking on SADA for the year. I guess if maybe under that framework, you know, could you give us an update on how you're thinking about SADA from an EPS contribution for the year?

I can't talk about SADA from an EPS contribution for the year. What I will say is that I don't think we updated it in May. I think the last time we updated it was in February. But here's what I would say. The dynamics of the SADA business have changed somewhat. We're refocusing on the mid-market clients. We're refocusing on net new, and we're expanding the services capability That was part of the reason that we acquired SADA to start off with as it relates to GCP and Google Workspace products specifically. All of that is reflected in the guidance range that we are reaffirming of 1060 and 1090 at the end of this year. We do expect them to perform at a higher rate and be accretive in the second half versus the first half.

And just to add on to that, I just want to re-emphasize The point, the whole goal of the whole focus of our SATA acquisition is to expand our multi-cloud capabilities. Strategically, it is very well aligned with our overall plans, super critical to customers. And we believe it's going to be a major capability for us as GenAI sort of starts becoming more financially impactful. So we really like it. We just have to be nimble enough to adjust to the priorities that Google has for us as a partner. And we're doing that.

Got it. Okay. Maybe just changing to a completely different subject. Joyce, you mentioned the global outage in your prepared remarks, and obviously sounds like you did a good job of helping customers through that. Just wondering, you know, more broadly speaking, now that the month of July is over, how has that impacted your security business, cybersecurity business growth trajectory in the month of July? Was there push outs to closing? Is there re-evaluations going on? And are you seeing any impact beyond just the cybersecurity business where customers might want to sort of pause and push out other projects beyond cybersecurity?

You know, I think it's caused us to have a lot of conversations about the resilience of our customers' environments, which is something we're very happy to do. I don't think we'd see it necessarily in the numbers in July, because that would be a really fast turnaround. But we are definitely having different conversations about, as I said, business continuity and resilience across our portfolio. So no financial implications, obvious in the July results, but definitely it's ramped up the focus and the conversations. And just the choices that our clients have around how to make sure that their business is set up for success and is as resilient as possible.

Okay, that's it for me. Thank you.

Thank you. The next question is from Antonacy Levinsinsky from Sidoti and Company LLC. The line is now open. Please go ahead.

Good morning, and thank you for taking the questions. So, you know, certainly a lot of discussion about SADA and its performance there. For the quarter, your gross profit was up 5%. Just wanted to get a better handle on your organic growth. So given Asada's performance and I guess as far as the other two smaller acquisitions, did you guys see actually organic growth actually in gross profit dollars in a quarter? Or maybe if you could just give more specifics in terms of your organic business versus the acquisitions.

Without going into details around it, we had organic growth in Q2.

And Glenna said SADA was decretive.

Sorry, not at the gross profit line. SADA contributed at the gross profit line. They were decretive at the EFO and EBITDA line, but they were part of our improvement in gross profit at the at the GDP line, but organically our business also grew. We have had historically over the last year, even with the revenue declines that we have shown, and even without the impact of acquisitions, we have had gross margin expansion associated with just the pricing and profitability initiatives that we've taken. So we've had gross margin expansion around hardware, even as hardware has declined, and we've had gross margin expansion around services as well.

Got you. Okay. And just to follow up on the profitability and the pricing initiatives, I mean, do you think you have additional opportunities here in the back half, or do you think you're mostly tapped out of those initiatives?

You know, Anthony, what I would say is that I think we do have a little bit incremental value that we can get out of the pricing and profitability initiatives. But I think more importantly, those initiatives are now foundational. They're structural changes that we made with regard to how we do business, how our salespeople sell in the marketplace, et cetera. So as we return to growth, we think that those foundational and structural changes that we've made around our pricing strategy will be embedded in the business and that we'll see the benefit from that in terms of higher gross profit dollars on the base of higher gross margin that we have. Incrementally, our growth margin may increase somewhat, but I think the greater value will be as we return to growth and the gross profit dollars that flow through on our base of higher growth margins.

Gotcha. Okay. And lastly, for me, as far as your acquisitions outlook for that, clearly you've done a lot of acquisitions over the years, including three deals the last 12 months or so. Are you focusing on more on absorbing these acquisitions near term or should we expect some additional deals here? How are you guys thinking about that?

You know, we've been very, very specific about our M&A strategy and we said we wanted to develop a programmatic M&A strategy that allowed us to add capabilities or augment capabilities in the fastest growing areas of the market. We're very committed to doing that. that we would be opportunistic about scale acquisition. So that hasn't changed.

Got it. Thank you very much and best of luck.

Thank you. Thank you.

Thank you. The next question is from Vincent Colicchio from Barrington Research. The line is now open. Please go ahead.

Yes, I'm curious. How your generative AI activities have been evolving on the services side? Are you seeing more work? What does the pipeline look like?

Thanks, Vince. Yeah, so we are making some investments in gen AI, but first of all, let me start by saying there's a lot of kicking of tires. There's a lot of POCs. There's a lot of discussion about it. There's a lot of conversations about governance, data readiness, and we are seeing some benefit of that in our services business. But it is really small still. So it's not meaningful from a financial point of view yet. But we are excited about the IP we are developing that helps clients get to outcomes faster. We are excited about the formalizing our offers around how we do assessments and then how we do ongoing sort of managed gen AI, which is going to be, I think, quite important because use case development is quite specific and it takes some time. And once you do one, you want to do more. So we are formalizing our offer development around that. And then we're also in the process of building a virtual lab that allows us to demo these cases and hopefully accelerate the adoption with chatbots or summarization tools or whatever. So lots and lots of discussion, lots of activity, mostly POCs. A bit of data preparation work, certainly some governance and policy work, but not meaningful in terms of financial outcomes yet.

And can you talk to the divergence perhaps of performance across client segments of enterprises, SMB, and government?

Yes, so our strongest segment is our commercial segment. So think about that as really mid-market and low end of corporate. We saw growth there in Q2, which is encouraging. Generally, the trends have been that we see growth in that segment first, and then that growth sort of expands to include the other segments later. We see our public sector business is largely state and local government. And that is, we see some improvement in that segment. And then enterprise is still a bit challenged, but moving in the right direction. Yes, they're all moving in the right direction. We expect them all to grow for the year.

Thank you.

Thank you. This is the end of Q&A session, and I'd like to hand over to Joyce Mullen for closing remarks.

Thank you all very much again for joining today. We're very excited about the opportunities ahead of us, despite sort of this choppy demand environment that we're in. I look forward to sharing our continued progress and our journey into becoming the leading solutions integrator. So Kiki, you can now close the call. Thank you.

Thank you. Please conclude today's conference call. You may now disconnect your lines.