Good day, ladies and gentlemen, and welcome to the Insight Enterprises Third Quarter 2016 Operating Results. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Glynis Bryan, Chief Financial Officer. Please go ahead.

Thank you. Welcome everyone and thank you for joining the Insight Enterprises conference call. Today we will be discussing the Company's operating results for the quarter ended September 30, 2016. I'm Glynis Bryan, Chief Financial Officer of Insight. And joining me is Ken Lamneck, President and Chief Executive Officer. If you do not have a copy of the earnings release that was posted this afternoon and filed with the Securities and Exchange Commission on Form 8-K, you will find it on our website at insight.com, under our Investor Relations section. Today's call, including the question-and-answer period, is being webcast live and can be accessed via the Investor Relations page of the 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, October 27, 2016. This call is a property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Insight Enterprises is strictly prohibited. In today's conference call, we will refer to non-GAAP financial measures as we discuss the third quarter and year-to-date 2016 financial results. When referring to non-GAAP measures, we will refer to such measures as adjusted. Adjusted measures discussed today will exclude the gain recorded in the second quarter of 2016 on an asset held for sale and severance and restructuring expenses recorded in all periods, as well as the tax effects of these items. You will find a reconciliation of these measures to our actual GAAP results included in the press release issued earlier today. Also please note that, unless highlighted as constant currency, all amounts in growth rates are discussed in U.S. dollar terms. Finally, let me remind you about forward-looking statements that will be made on today's call. All forward-looking statements that are made in 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 Annual Report on Form 10-K for the year ended December 31, 2015. With that, I will now turn the call over to Ken to give you an overview of our third quarter 2016 operating results. Ken?

Hello everyone. Thank you for joining us today to discuss our third quarter 2016 operating results. I'm pleased to report another strong quarter of performance in our business. Each of our operating segments delivered solid top-line growth and have continued to manage expenses, which showed strong earnings growth year over year. Consolidated net sales of $1.4 billion, up 4% year over year and 6% in constant currency. In constant currency, all three operating segments reported top-line organic growth year over year while also delivering growth in each of our reported categories of hardware, software and services. Gross profit of $182 million in the third quarter was flat year over year and up 2% in constant currency. Gross margins declined 50 basis points year over year to 13.1% due primarily to lower product gross margins, including lower mix of vendor funding and changes in business mix transacted in the quarter. Consolidated selling and administrative expenses were $145 million in the third quarter, down 3% U.S. dollars and 1% constant currency. Adjusted earnings from operations increased 9% year over year to $37 million. On a GAAP basis, earnings from operations increased 12%. And adjusted diluted earnings per share were $0.62. On a GAAP basis, diluted earnings per share were $0.60. Our North American business performed very well in the third quarter against the tough comparison to the strong double-digit growth on the top line and bottom line delivered in last year's third quarter. Net sales in North America increased 3% year over year to $1.1 billion. Within these results, hardware sales grew 2%, reflecting continued strength in demand for client devices, as well as server and storage solutions. Software sales increased 3% year over year and services sales increased 12% year over year, assisted by the Blue Metal acquisition we completed last…

Thank you, Ken. Overall for the nine months of 2016, we're pleased with our results across the business. Low single-digit top line growth, combined with gross margin expansion and improved operating leverage, have driven double-digit earnings growth year over year in the first nine months. Our top line results year to date have been negatively impacted by a higher mix of sales recorded net, primarily driven by the adoption of cloud offerings by our clients. Despite the top line uptick, we're pleased with our execution in helping clients assess, acquire and implement cloud solutions, and those sales now drive approximately 14% of our gross profit. In addition, all three of our operating segments have grown gross profit faster than SG&A for the first nine months of 2016 and delivered double-digit earnings from operations over [ph] the same period all in constant currency. Consolidated net sales of $4 billion in the first three quarters are up 1% compared to the same period last year, and in constant currency, net sales are up 2%. In North America, net sales increased 3% year over year in the first nine months of 2016, with particularly strong growth in client devices and service and storage. In EMEA, net sales are flat year over year in constant currency, but higher sales of software and services offset the effects of lower hardware sales and retail business. And in Asia Pacific, net sales were down 2% in constant currency due to a higher mix of software sales recorded net. Consolidated gross profit for the first nine months of 2016 was $552 million, up 3% in U.S. dollars and up 5% in constant currency. Gross margin expanded 30 basis points to 13.7% in the first nine months of this year, due primarily to the increase in cloud and maintenance…

Thank you, Glynis. Let me go on to our outlook for 2016. We're pleased with the team's execution in the third quarter and believe we're well-positioned heading into the fourth quarter to meet our financial and operational objectives for the full year. Given our year-to-date 2016 financial performance, we're maintaining our outlook that we expect net sales in 2016 to grow at a low single-digit range year over year and we're increasing our adjusted diluted earnings per share outlook for the full year to a range of $2.45 to $2.50. This outlook reflects an effective tax rate in the fourth quarter of approximately 37% to 38%, but also severance and restructuring expenses and the gain on building sales during the year. Thank you again for joining us today. I want to thank our teammates, clients and partners for their dedication to Insight. That concludes my comments. I'll now open the line up for questions.

Certainly. [Operator Instructions] Our first question comes from the line of Brian Alexander from Raymond James. Your question please.

All right, thanks. Hey, could you guys talk a little bit more about the demand environment in North America heading into the fourth quarter relative to what you would expect from a seasonal perspective? And any color by customer segment and by product would be helpful. And then related to that, the HP transaction that you guys had, how much revenue is that adding in the second half?

Okay, I'll start off. Thanks, Brian, for the question. Yeah, I think the demand environment, as we indicated, is looking certainly very stable. We've seen good growth in a lot of different areas. Certainly cloud, as you saw with Microsoft, is growing very, very well, and we're certainly participating, as our numbers indicate that we're actually doing a little better than the channel is from a growth point of view on the cloud, based on their data. On the hardware side, we see pretty good growth. Certainly notebook computers did very well on the quarter in the channel. Desktops, as expected, were down. Service grew pretty nicely too, about 6-1/2%. We saw that storage was a little bit down as well in that sort of category, and networking spend was a little bit down. So overall I'd say certainly some -- a decent amount of growth in the channel, but in different pockets, in different areas. And certainly we participated in those. Glynis, did you want to touch on the HP --

Sure. What I would say, Brian, is that our expectations are that we [inaudible] talk about a $75 million benefit from that contract in the second half of 2016. I think that we're going to be short of that. We've brought over the teammates in a little bit shorter ramp than we had anticipated. So I would say right now we don't have a revised forecast for what that would add, but it's not going to be in that $75 million range that we had talked about previously.

When you do ramp that up, as we look into 2017, how do you expect that to play out on an annualized basis? Or is this contract permanently lower than you thought it would be?

No, I wouldn't say the contract is permanently lower than we thought it would be, it's just been a little bit slow to ramp than we had anticipated. I would say that in 2017, we haven't given guidance yet, we'll give you some guidance when we give the 2017 guidance, but it will be north of that $75 million expectation that we had for the second half of this year.

Okay.

-- Brian, still very positive on it, the teammates that we brought over, very well-skilled, just taking a little bit of time to develop that SMB [ph] business, but very solid.

Okay. Just on the gross margin decline in North America, how much of that was mix versus vendor incentives? And was there any element of competitive pricing? And then, just how should we think about gross margin trends in North America going forward? You were flattish in Q1, up quite a bit in Q2, and then down in Q3. Is it best to think about gross margins in North America flattish going forward?

So we had some large contracts in Q3 of 2015 that were highly lucrative last year that drove the results that we had in the third quarter of 2016 last year, some large deals that we had. This year we didn't see a repeat of those. That's why we were a little bit cautious with some of the guidance that we gave related to Q3. I would say that we performed well. But I think that, when we talked in the second quarter, maybe in the first quarter, when talked about -- when we released the first quarter results and we talked about expectations for the year, what we said is that we're going to be making these reductions in our SG&A, because the margin profile that we're looking at in North America is a little bit more muted than we would like. So, to your question, we do believe that the margin in North America is in this range that we're seeing here. It's different than the second quarter when we have the very large year-to-date range, not just this quarter range to be clear, it's different than the second quarter when we have the large Microsoft piece [ph] and we had a lot of productivity from Microsoft on that in that second quarter. But in general we're anticipating that our margins in North America are going to be more comparable to -- like the year-to-date margins that we're seeing. And we're taking the reductions in our SG&A as a result of our outlook on those margins so that we can drive the [EFL] that we need in our business.

Okay. And then maybe over in Europe, you had a nice revenue surprise, at least on the software side, gross margins were a little bit lower. So, maybe just kind of talk about how things played out over in Europe relative to our expectations, and just the sustainability of the software upside that you saw.

So I would say the software upside that we saw was related to two very specific deals. So I wouldn't think of that upside in software as something that we would see on a go-forward basis. The performance in Europe to date, as you say, second quarter year to date, has been very, very strong, specifically as it relates to gross margin, because they have a significant amount of cloud business that's transacted net. So we haven't seen the growth in revenue in EMEA through the second quarter. What we saw in the third quarter was growth, not in the cloud, but growth in kind of software product business transacted at very low margins for some very large enterprise clients. That happened in every quarter. However, in the third quarter, which was our lowest revenue quarter, it has a bigger impact. So we typically have software deals that transact at lower margin related to large enterprise clients. In EMEA on a go-forward basis, you should anticipate that revenue is going to remain a little bit more muted still only because they also have a significant volume of cloud business that is transacted on a net basis, but typically that has translated into higher gross margin. This quarter will be a little bit of an aberration to that story.

Okay. And then finally for me, cash flow, I think year to date you're running a use -- I know there was a pull forward last year that might be distorting the cash flow numbers, so, maybe just remind us of what your goals would be on an annualized basis for cash flow from operations.

On a normal basis, we would say that we'd anticipate our cash flow is going to be in the range of $80 million to $120 million. At the end of 2015, we had cash flow from operations of $181 million. Included in that was a $60 million receivable which the payable actually hit us in -- in January. So on a normalized basis, if you add back that $60 million to what our expectation is related to cash flow from operations, we'd be at the lower end of that range this year. We're using a little bit more cash to fund the working capital requirements in the business, and in Q3 specifically we also had some decisions that we made, ultimately proactively, with regard to taking advantage of certain one-time discounts in terms of funding about $40 million early as it relates to a specific client and a specific vendor. And then we also have about $46 million associated with some planned rollouts that we're going to be transacting over the next couple of quarters. So there were some conscious decisions that we made in the third quarter of 2016 that would impact it. But normalized for the $60 million, we'd anticipate that we're going to be at the lower end of our $80 million to $120 million range.

Yeah, that's what I was trying to get at. So as we think about 2017, assuming normal demand environment and puts and takes to margins, you would expect to be back within that range.

Yes. Yes.

Okay. All right. Thank you.

Good to have you back.

Glad to be back. I figured I'd make a guest appearance like Hal Schwarber [ph].

Very productive.

Thank you. Our next question comes from the line of Matt Sheerin from Stifel. Your question please.

Yes, thanks. Just a couple for me. In your opening comments, Glynis, you talked about cloud-based sales representing a percentage of gross profit. I didn't get that number. What was that number?

Fourteen, 14% of GP, cloud sales, 14% of GP -- 14% of total GP.

Of total GP. And what is that compare on the year-over-year basis?

Last year it was around 9%, 9% or 10%.

And is that a higher number --

And that's a year-to-date number. That was a year-to-date number that I was giving.

Got you. Is that a higher number in Europe?

Yes, it is. I don't have that number off the top of my head, but it is a higher percentage in Europe.

Sure. And then just in terms of the North America business, I know you have some public sector exposure, maybe not as much as other, but did you see kind of the normal budget flush on federal and staying local?

We did see growth in our public and in state and local, the growth in our -- sorry, in our fed. The growth in fed was higher I think than the growth in the state and local.

Okay.

I'm not sure that it's budget flush, but I guess third quarter being the end of their calendar year, it probably was related to budget flush.

Yeah. And just on the -- I mean you talked about some of that puts and takes of the margins in EMEA, but obviously in June quarter there was some -- you had very good operating margin there and then you were basically breakeven again in the September quarter with seasonal swings in revenue but also on the margin. And that's been sort of the story, these big quarter-to-quarter swings, and I think that's -- whereas North America, it's -- you're more stable and moving in the right direction. So the question is, are you trying to figure out how to better manage that quarter to quarter? I know there's been focus on a mix of business, diversifying away from the enterprise customer somewhat there. But, how do you think that plays out and what are you doing to sort of help stabilize that?

So I think that when you look at it over the year, the margins in EMEA generally on an improving trend over the course of a year. As I look at quarter two to quarter three, the majority of our business in EMEA is software related, which just has a different dynamic. So in Q2 in particular, that gets exacerbated because it is the yearend to one of our largest partners and that actually triggers our largest software quarter. So when you look at the business in EMEA, it is like 60-something percent, 70% software, versus in the U.S. we have the inverse. In the U.S., our business is at 50% to 60% hardware. That gives us a little bit more stability in the underlying dynamics of the North America business relative to the EMEA business. So between Q1 and Q2, you would see a difference related to the software dynamics between Q2 and Q3. In EMEA you're going to see a difference related to software dynamics. But if you go back and you look historically since 2014, 2015, and now in 2016, you will see that EMEA has consistently increased their gross margin on an annual basis. And that actually is the way that we evaluate them. On an annual basis, because with the mix of software that we have and the migration to the cloud, there was going to be that spikiness from one quarter to the other depending on the preponderance of software in any given quarter. [Inaudible] in Q3 weren't significantly different from our expectations. We wouldn't have thought the GP would be down necessarily on -- gross margin would be down necessarily in a year-over-year basis, but they did have those two large software product deals at low margin [inaudible] delta and not as much of a cloud business as a percentage of the total.

Yeah, just to add, you know, Matt, of course, that's their lowest revenue quarter of the year, just due to, you know, the summer holidays and so forth. But we'd say, when you look at from an earnings from operations perspective, when you look at 2015, you know, double-digit growth from the year prior, and continuing that trend this year as well. So, making progress. We're certainly on it, and one that we certainly are continuing to do.

Sorry, Matt. Just -- yeah. We're also looking at -- we look at EMEA on a constant currency basis.

Got you. And just on the hardware business there, you did have sequential growth but you've basically been, on a year over year basis, you had good, I guess, comps there, but that's also been a sort of declining trend there. And is part of that just the shift -- your customers shifting to cloud, or are you doing different things with your vendors or de-selecting products that are unprofitable? What's the strategy there?

I think a lot [inaudible] impact, most of that business for us, and from a hardware perspective, occurs in the U.K. That's the biggest market for us, for hardware. We sell hardware pretty effectively in Germany and the Netherlands. And the other countries, they're primarily software. So the U.K. is the biggest source of revenue in the hardware front for us. And I think that's been a little bit muted. A lot of it is just due to some of the consternations going on with potential changes coming forward there. So we're seeing the hardware side of the business actually certainly a little bit more pressured than the software side.

So the hardware market in the U.K. is down. The overall hardware market in the U.K. is down. We're down consistent with that, and maybe in the third quarter a little bit more, but not significantly different from the market for hardware in the U.K.

Okay. And do you see a bit of a currency headwind in the U.K. given the declining currency there in the last couple of months or so as a headwind? You're taking your overall EPS number for the year up, but based on our numbers, it's a little bit lower. So, does that have anything to do with currency impact?

By the time you get through to the bottom line at the EFL and EPS line, the currency impact is more muted. You can definitely see it in the revenue GP line. So I wouldn't say that the reason for the top end of our forecast is around currency. But I think that, when you think about the dynamics about what's happening in EMEA, specifically as it relates to the Brexit, everybody general consensus is that the market performed stronger than they had anticipated immediately following Brexit. They're starting to see a little bit of [inaudible] coming through in this fourth quarter as it relates to things slowing down a little bit. And there was lower than anticipated slowdown going into 2017 as it relates to the U.K. specifically, with potentially some upside in the rest of Europe. So, a little bit of that is reflected in what we have here, as well as at the end of the year we tend to have higher healthcare costs, and we've reflected some of that in the numbers that we're putting forward. So that's the reason why we took up the bottom end of the range significantly from 237 to 245, and then we took the top end of the range up to 250.

Okay. All right. Thanks a lot.

You're welcome.

[Operator Instructions]