Insight Enterprises, Inc.

Hello everyone, and thank you for joining the Insight Enterprises second quarter 2025 operating results call. My name is Sammy and I'll be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you want to switch to change your mind, please press star followed by two on your telephone keypad to remove yourself from a question queue. I'll now hand over to your host, Ryan Miyasato, Director of Investor Relations to begin. Please go ahead, Ryan.

Welcome, everyone, and thank you for joining the Insight Enterprises earnings conference call. Today, we will be discussing the company's operating results for the quarter ended June 30th, 2025. I'm Ryan Miyasato, Investor Relations Director of Insight. And joining me is Joyce Mullin, President and Chief Executive Officer and James Murgato, 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 will find it on our website at insight.com under the Investor Relations section. Today's call, including the question and answer period, is being webcast live and can also be accessed via the Investor Relations page of our website at insight.com. An archived copy of the conference call will be available approximately 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, July 31st, 2025. 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-GAP financial measures as we discuss the second quarter 2025 results. When discussing non-GAP measures, we will refer to them as adjusted. You will find a reconciliation of these adjusted measures to our actual GAP 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 statement made on this call, whether as a result of new information, future events or otherwise. With that, I will now turn the call over to Joyce. And if you're following along with the slide presentation, we will begin on slide four. Joyce?

Thank you very much, Ryan. Good morning, everyone. And thank you for joining us today. In Q2, we executed well and met our expectations as we navigated a challenging environment, primarily driven by partner program changes. Our hardware business delivered growth for the second consecutive quarter, and we achieved strong profitability milestones. Total growth margin of .1% and adjusted earnings from operations margin of 6.2%, both Q2 records. In the quarter, hardware revenue grew 2% with growth in both devices and infrastructure. Hardware revenue in North America grew 4%. Revenue from our commercial clients grew 8%, which is the fifth consecutive quarter of growth. The underlying SaaS and infrastructure as a service business grew double digits and in line with expectations, offset by the partner program changes we've discussed previously. We made internal adjustments to address the program changes, and we will continue to focus on capturing growth in the cloud business. Overall, cloud gross profit declined 5%. Insight core services revenue was down 2% as we continue to see delays in initiating new services projects, particularly in our large enterprise clients. We also prudently managed adjusted ST&A expenses, which were down 3%. As a result, adjusted earnings per share were in line with our expectations. While macroeconomic factors, including tariffs, legislative policies, affecting supply chains and interest rates, continue to impact our clients' investment decisions, we are well positioned in terms of expertise, particularly AI, to grow as the environment improves. As the technologies we offer to our clients continue to develop, we are adapting our ambition to becoming not only the leading solutions integrator, but the leading AI-first solutions integrator. Here's what we mean by that. We are aggressively adopting AI internally across all disciplines and all regions. We've enhanced our services portfolio by integrating an AI-first approach. We are adapting our offers to support our clients' focus on delivering measurable and meaningful business value through pragmatic deployment of AI solutions, delivering results fast, and earning the right to do more. We offer our clients full lifecycle AI services, including consulting, implementation, training, governance, and managed services support. And while it's still early in terms of project deployment and the initial deployments are small, we've made good progress on multiple fronts. For example, we have deployed hundreds of agents internally and for client projects. We've completed over 200 AI assessments with our clients, more than quadrupling the number compared to the last quarter. In software development, we've delivered significant improvements in productivity. Infrastructure hardware bookings are increasing as clients prepare their on-prem and cloud environments for AI workloads. In addition, we continue to drive adoption of AI internally to improve our SG&A leverage. We are excited by the momentum in this space. And as an interesting aside, this wave of technology adoption is primarily being driven by business units and business leaders with support from IT. This is different from cloud, which was driven by IT with support from the business. As an example of our efforts with AI, I'm very pleased to share that Gartner has named Insight an emerging visionary in its inaugural innovation guide for generative AI consulting and implementation services. This recognition underscores our innovation first mindset and our emerging strength as an AI first integrator. At Insight, we deliver measurable outcomes and help clients navigate the complex challenges of gen AI adoption from data readiness and governance to security, scalability and achieving ROI. Clients across all industries are beginning to leverage AI in virtually every aspect of their businesses, including new product development, go to market models and back office functions. I'd like to share a few examples. We worked with a major retail client, the largest authorized retailer for a leading telecommunications provider operating nearly 1700 locations across all 50 states. They needed to address inefficiencies in their legal document review process, so they partnered with Insight to develop an AI powered platform. Insight developed a custom AI solution using Microsoft Azure OpenAI service to automate legal document review. The platform analyzes millions of documents, identifies key data points and provides contextual summaries for legal cases. Our AI solution automated the process of reading, understanding and analyzing fast legal data sets while ensuring data privacy and confidentiality through secure Azure cloud integration. This project eliminated over a hundred thousand hours annually from manual document review, improved accuracy and reduced human error, leading to projected annual savings of seven and a half million dollars. Understanding the essential foundational elements necessary for effectively implementing AI is crucial. This includes assessing the quality and accessibility of data, as well as implementing robust security protocols. And as AI adoption grows, so too does the threat surface. Mining operations are capital and technology intensive and security is critical. We partnered with one of the top gold producers in the world. They needed to consolidate disparate security tools across multiple acquisitions to improve effectiveness and reduce overlap. We established ourselves as a trusted advisor and implemented a Palo Alto network solution, delivering single source security services across multiple countries. Our solution addressed security posture concerns through technology consolidation and consistent security policies. We provided professional services to retire duplicate technologies and optimize their security infrastructure. This led to a multi-year managed service agreement with Insight and meaningful cost savings for our clients. Our partner ecosystem is critical to our success. Given our leading partner relationships with companies like Nvidia, Google, Microsoft and others who are changing the world right now, we are in a strong position to help clients simplify this complex space and optimize their business outcomes. You can see recent awards in the accompanying slide presentation. As I mentioned previously, we have been included in Gartner's innovation guide for generative AI consulting and implementation services. Furthermore, we have been named a finalist for CRM's 2025 best AI solution provider. Our teammates are integral to delivering the value we create for our clients. We foster a collaborative environment and Insight continues to be recognized as a great place to work by various organizations. Most recently by Newsweek and Forbes. Now, I'd like to share my thoughts on the remainder of 2025. Exiting the first half of the year, adjusted earnings from operations were in line with our expectations. As I mentioned, we are committed to our ambition to become the leading solutions integrator. However, in response to significant technology trends and the overwhelming impact of AI, we are adopting this ambition to become the leading AI first solutions integrator. Our strategy remains focused on simplifying the complex for clients and delivering outcomes with our full portfolio of hardware, software and services. And as AI adoption grows, we believe we are well positioned. We have long standing relationships with a broad base of clients across the globe. We have strong partnerships with the companies and platforms that are changing the world. We have a deep understanding of the cloud platforms and the hardware required to run the environments that will be critical to our client success. And we have a dedicated team of experts who are eagerly embracing new tools and processes to deliver results fast. As we have discussed for the past few quarters, we are weathering partner program challenges. In the near term, we are cautiously optimistic for the second half of the year as we navigate the macro factors that weigh on our client spending decisions. In the midterm, we are very well positioned to lead our clients through this rapidly changing technology environment. Our commercial client revenue has grown for five consecutive quarters and we expect our corporate and large enterprise clients purchasing to increase in the second half. Demand drivers for device refresh remain, namely the age of the installed base in Windows 10 end of life and infrastructure spending is improving after a prolonged period of digestion. As a result, we believe hardware demand will continue to build throughout the year. We are pleased with the services performance of the companies we recently acquired. Our investments in our advisory capabilities have also been successful, allowing us to pull through other elements of the portfolio. This was our thesis that we could leverage those capabilities to sell more to our existing client base. The services growth, however, is offset by pauses in deploying infrastructure projects and some continued hesitancy regarding discretionary spending, especially in our largest enterprise clients. Although we expect services to improve modestly in the second half, demand will remain muted. M&A remains key to our ambition to become the leading AI first solutions integrator and we are focused on the fastest growing areas of the market, cloud, data, AI, edge and security. Our team is executing well as we have pivoted from legacy partner programs to focus on the services and solutions most critical to partners and clients alike. As we execute for, we expect partner program changes to be largely normalized and we will continue to prudently manage SG&A while balancing investments in our solution and AI capabilities. With that, I'll turn the call over to James to share key details of our financial and operating performance in Q2 as well as our outlook for 2025.

James. Thank you, Joyce, and good morning, everyone. Our Q2 adjusted earnings from operations and diluted earnings per share were in line with our expectations with gross profits slightly below offset by strong operating expense management. Net revenue was two point one billion dollars, a decrease of three percent in U.S. dollars and four percent in constant currency. The decrease was driven by a four percent decline in product primarily due to on prem software, which declined 14 percent and was a result of partner consolidation last year that shifted gross product revenue to net agency services. Hardware revenue increased two percent, the second consecutive quarter of growth. Gross profit decreased two percent, primarily due to partner program changes. Hardware gross profit was up two percent, reflecting growth in both infrastructure and devices. Insight Core Services gross profit was 78 million dollars, a decrease of three percent, primarily due to a decline of our product attached services as large enterprise clients delayed projects. Cloud gross profit was one hundred and twenty three million dollars, a decrease of five percent due to the partner program changes we've previously discussed. This was in line with our expectations. And as noted last quarter, we anticipated the headwinds to be weighted more in the first half of the year. We continue to anticipate some headwinds in Q3. However, by the time we execute for we expect the impact to be largely normalized. Gross margin was twenty one point one percent, an increase of ten basis points. Adjusted SG&A declined three percent, driven by prudent expense management. This resulted in adjusted EBITDA of one hundred thirty eight million dollars, a decrease of two percent, while margin expanded ten basis points to six point six percent. An adjusted diluted earnings per share were two dollars and forty five cents, flat year over year in U.S. dollar terms and down one percent in constant currency. For the quarter, we utilized one hundred seventy seven million dollars in cash flow from operations, primarily related to interquarter working capital requirements, which have reversed in July. For the year, we continue to anticipate cash flow from operations in the range of three hundred to four hundred million dollars. In Q2, we repurchased approximately seventy six million dollars of shares. And as of the end of the quarter, we have two hundred and twenty four million dollars remaining for our share repurchase program. We intend to opportunistically repurchase shares while balancing organic and investments. While we settle three hundred and thirty three million dollars of convertible notes in Q1, we still have approximately one point two million associated warrants outstanding, which will be settled before the end of the year. As a reminder, during the first half of the year, we settled three point six million warrants for two hundred and twenty two million dollars and settled another three hundred thousand warrants and shares. The benefit of settling the warrants in the first half have been reflected in our outstanding diluted share accounts. We actually Q2 with total debt of approximately one point three billion dollars compared to one billion dollars a year ago. Over the last year, we spent four hundred and sixty three million on share repurchases and the settlement of warrants while debt only increased three hundred and thirty million dollars. As of the end of Q2, we had access to the full one point eight billion capacity under our facility, of which approximately one billion was available. We have ample liquidity to meet our needs. Our adjusted return on invested capital for the trailing 12 months at the end of Q2 was fourteen point four percent compared to 17 percent a year ago, reflecting an increase in invested capital and lower adjusted net income. As I think about the first half, it has played out largely as we anticipated. Hardware is on track, driven by multiple quarters of commercial growth with signs of recovery moving to larger clients. While partner program changes have impacted our cloud results in the first half, we're on track with our progress on pivoting to the corporate and midmarket space. However, core services has been challenged, primarily due to a lack of large enterprise client spending in the infrastructure space. As we think about the remainder of twenty twenty five, we expect macro uncertainty to remain and have considered the following factors in our guidance. We continue to believe that our growth and profitability will be more heavily weighted toward the second half of the year. We believe hardware demand will exhibit a steady increase throughout the year and expect hardware gross profit to grow in the mid single digits. We expect demand with our large enterprise clients to modestly improve over a subdued first half. We expect core services to grow in the low single digits. We anticipate cloud performance to improve as we continue to pivot to the mid market space, as well as having easier comps in the second half. For the year, cloud is expected to be flat to slightly down. We control the expenses in the first half, which we will continue to prudently manage and expect .N.A. to grow slower than gross profit. We have identified incremental opportunities to drive operating expense leverage over the next 12 months. Considering these factors for the full year, our guidance is as follows. We expect gross profit to be approximately flat from twenty twenty four and that our gross margin will be approximately 20 percent and our adjusted diluted earnings per share remains unchanged and will be between nine dollars and seventy cents to ten dollars and ten cents. This guidance includes interest expense between seventy five million to eighty million dollars, an effective tax rate of twenty five to twenty six percent for the full year, capital expenditures of thirty to thirty five million dollars and an average share count for the full year of thirty two point four million shares, reflecting the settlement of the remaining warrants associated with our convertible note. This outlook excludes acquisition related intangible amortization expense of approximately seventy four million dollars, assumes no acquisition related costs, severance and restructuring or transformation expenses, and assumes no change in our debt instruments and no meaningful change in the macroeconomic outlook, either as a result of tariffs or otherwise. I will now turn the call back to Joyce. Joyce?

Thank you, James. Overall, we navigated the first half of the year well. We are excited about the new technologies and the results our clients can achieve with AI. We also remain committed to the core elements of our business, which serve as a critical foundation in order for our clients to unlock the full potential of Gen. I want to thank our teammates for their unwavering commitment to our clients, partners and each other, our clients for trusting insight to help them with their transformational journeys and our partners for their continued collaboration and support in delivering innovative solutions to our clients. This concludes my comments and we will now open the line for your questions.

Thank you, Joyce. 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. In preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Joseph Cardoso from JP Morgan. Your line is open. Please go ahead.

Hey, Joe, are you there?

Joseph, your line is open. I will come back to Joseph.

Thanks, Sammy.

Our next question. Our next question comes from Adam Tindall from Raymond James. Your line is open. Please go ahead. Sorry, Adam. Your line is open. Please go ahead.

Sammy, it sounds like maybe there's something wrong with the line maybe.

Yeah, let me bear with me one second. Adam,

your line is open. Please go ahead.

Adam, can you hear us?

I can hear you.

Adam,

your line is open. Please go ahead. We can hear you. Okay,

you can hear me now?

Alright,

let's try this again.

Hey Adam, I thought that was the

easiest question.

Hey Adam, can you hear us? Adam, can you hear us? Yes,

I can hear you.

Okay, Adam, I thought that was going to be the easiest question you've ever asked us, because it was completely silent.

We could just, yeah, you choose the question, how about that? Can you imagine I'm going to ask you about the guide here, James? So let me start with that. I appreciate it, guys. Good morning. So James, the guidance is obviously approximately flat on gross profit dollars. As we finished up the first half, it was down about mid-single digits. So you're implying that gross profit dollars have to be up around mid-single digits in the back half. And I wonder if you might just detail some of the key drivers as you thought about that improvement. It sounds like some of it's predicated on hardware improvement, but some of your competitors have suggested that there's been pull-in in hardware in particular, and we're a little bit more cautious on the back half. So you could maybe comment on that dynamic as well as your key drivers to hit that mid-single digit implied in the gross profit dollar growth.

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

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

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

Our next question, our next question comes from Jerry Cardoso JP Morgan. Your line is open. Please go ahead.

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

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

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

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

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

Appreciate the color, Joyce and James.

Thank you.

Thanks. Thanks, Joe.

As a reminder, to ask a question, please press star for number one on your telephone keypad. Our next question comes from Anthony Labiedzinski from Zydotti and Company. Your line is open. Please go ahead.

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

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

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

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

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

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

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

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

That's very helpful. Well, thank you very much and best of luck.

Thank you, Anthony.

Our next question comes from Vincent Colletier from Barrington Research. Your line is open. Please go ahead.

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

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

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

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

Thank you.

Thank you, Vince. Thanks, Ben.

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

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

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