Greetings and welcome to Insight Enterprises' Second Quarter Operating Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host Ms. Glynis Bryan, Chief Financial Officer. Thank you, you may begin.

Thank you, Donna. 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, 2019. 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 morning and filed with the Securities and Exchange Commission on Form 8-K, you will find it on our website at insight.com under 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 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 6th, 2019. 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 refer to certain non-financial -- certain non-GAAP financial measures as we discuss our second quarter 2019 financial results. When referring to non-GAAP measures, we will refer to such measures as adjusted. Non-GAAP measures to be discussed in today's call include adjusted earnings from operations, adjusted EBITDA, adjusted diluted earnings per share, adjusted return on invested capital, and adjusted free cash flow. You will find the reconciliation of these adjusted measures to actual GAAP results included in the press release and the accompanying slide presentation issued earlier today. Also please note that unless highlighted as constant currency all amounts and gross rates are discussed on U.S. dollar term. Finally, let me remind you about forward-looking statements that will be made on today's call. 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 annual report on Form 10-K and reports subsequently filed with the SEC. With that, I will now turn the call over to Ken. And if you're following along with the slide presentation we will begin on slide 4. Ken?

Hello everyone and thank you for joining us today to discuss our second quarter 2019 operating results. In the second quarter, we executed well against our strategy to deliver IT solutions to our clients globally leading with services and solutions that drive business outcomes for our clients and result in improved profitability for our business. We also announced plans to acquire PCM to strategically expand our scale and reach with new clients in North America and EMEA. Our disciplined execution so far in 2019 has driven an earnings results ahead of our expectations and our core business is on track to exceed our previously stated financial targets for 2019. At the same time, we're working to expeditiously close the PCM acquisition and integrate PCM's business into ours. We're excited about the momentum in our business and our opportunities to continue to create value as we head into the back half of 2019 and beyond. Now, turning to the second quarter results you're seeing on Slide 5. Consolidated net sales in the second quarter were $1.84 billion consistent year-over-year in U.S. dollars and up 1% in constant currency. We focused on growing our services and solutions business mix which drove gross margins up 60 basis points year-over-year to 15% in the second quarter, a new record for our company. And adjusted diluted earnings per share was $1.49, up 3% year-over-year and on a GAAP basis, diluted earnings per share was $1.38. Our second quarter results reflect our strategy to improve our gross margins by leveraging our four solution areas to optimize our business mix and higher margin categories. Each region grew gross profit dollars mid to high single-digits year-over-year on constant currency and improved their margins year-over-year. These results were driven by higher mix of gross profit from services sales including…

Thank you, Ken. As Ken noted earlier, we're pleased with our global team's execution in the second quarter. I'll start with North America on slide 10. In North America, net sales were $1.4 billion in the second quarter, up 3% this year compared to 7% growth reported in the second quarter of 2018. Hardware sales increased 4% year-over-year and were up 25% sequentially. Services sales increased 10% year-over-year in the second quarter, including higher sales of cloud solutions as well as the acquisition of Cardinal; while software sales decreased 6% year-over-year, reflecting continued migration of on-prem licenses to cloud alternatives. Gross profit in North America was up 4% year-over-year and gross margin improved 30 basis points to 14.2%, reflecting the increase in the cloud and services sales in the business. North America selling and administrative expenses increased year-over-year, primarily due to the Cardinal acquisition. As a result, adjusted earnings from operations decreased 1% year-over-year to $55 million for the quarter. Moving on to EMEA on slide 11, in EMEA net sales in the second quarter declined 3% in constant currency to $379 million, reflecting lower volume with large enterprise and public sector clients mostly in the hardware category. The decrease in hardware was partially offset by an increase in services due to higher sales of software maintenance and cloud subscription products as well as higher sales of professional services engagement. Our team's focus on cloud and services sales drove gross profit growth of 9% in constant currency and expanded gross margins by more than 190 basis points to 17%. We also control expenses, which drove adjusted earnings from operations up 16% in constant currency compared to the same period last year and adjusted EFO margin to 4.4%, which is up 75 basis points year-over-year and a new record for the…

Thank you, Glynis. Before I turn to our outlook for the full year of 2019, I'd like to remind you of our four strategic priorities. First, we are focused on optimizing our opportunity in our four solution areas, leading with services and solutions to drive profitable growth ahead of the market and higher gross margins each year. Second, we remain disciplined embracing a metric and information-based culture that guides our investments with the goal of driving leverage on our cost structure and we plan to optimize our use of capital by investing in organic growth, pursuing strategic M&A opportunities to expand our offerings and global footprint, and then returning cash to our shareholders. Moving on to slide 17. Our strategic investments in our solution areas have positioned us well to compete in the markets we serve. Our deep technical knowledge and resources and our differentiated service offerings, strengthened by market-leading partners, allow us to serve clients of all sizes across many verticals and on a global scale. On slide 18. With respect to our full year 2019 outlook we continue to expect to deliver sales growth in our core business in the low single-digit range compared to 2018. We're increasing our outlook for adjusted diluted earnings per share and now expect adjusted EPS for the full year of 2019 to be between $4.85 and $4.95. This outlook assumes an effective tax rate of 25% to 26% for the balance of the year, capital expenditures of $20 million to $25 million for the full year and an average share count for the full year of approximately 36.2 million shares. This outlook does not reflect the results of the PCM acquisition that is expected to close by the end of the third quarter of 2019, the repurchase of any shares that may be made under our current share repurchase program and acquisition-related or severance restructuring expenses incurred in 2019. Thank you for joining us today and thank you for all our teammates across the globe for their performance in the second quarter. That concludes my comments and we'll now open your line up for your questions.

Thank you. [Operator Instructions] Our first question is coming from Adam Tindle of Raymond James. Please go ahead.

Okay. Thanks and good morning. I just wanted to start Ken it's been just over a month since you announced the intent to acquire PCM. I would imagine you've been able to talk to vendor partners and also customers about this. So I'm just hoping you can maybe give us a sense of the general response from vendor partners and customers since you announced the intent to acquire PCM?

Yes. Thanks, Adam. From a partner base point of view very positive. As you know of course, we align very closely to the same partner community. And so all the partners we've discussed feel like there's additional leverage. The combination really takes advantage of what both capabilities we have. So to a partner it's been very positive in all respects. On the client front, it's a little difficult. Obviously, as you know we're still competitors at this stage. So we're very careful in any communication we have with our clients. Clients that have brought it up have only brought it up in a positive vein, but certainly we don't really comment on that at this stage due to the nature of this deal being in the quiet period.

Okay. And maybe just kind of digging into the financials that you outlined for Q4, and I don't know if maybe Glynis wants to touch on this as well. I think if I add back the intangible amortization, the EFO margin in Q4 that is implied here is like mid-1% range and I would think that Q4 is typically when you get pretty good leverage with year end budget flush for PCM. Is there anything distorting that number that I'm missing? And maybe just touch on why margin is so low for that business and why that asset is attractive.

I don't -- I wouldn't say necessarily that the margin is low for the business in general. Once -- in the Q4 we don't have the reflection of the synergies realistically in terms of it being the first quarter post-closing. So we've indicated that we anticipate getting about $0.70 in 2020 in terms of EPS -- adjusted EPS coming out of the business when we actually have the synergies under our belt and are ramping up to our two-year run rate of getting to the $70 million. So I think it's just a timing issue with regard to the timing of close expectations that we have with regard to noise as we go through the close process and talk to the sales organization et cetera. And historically when you look at the PCM results their Q4 gross margins have historically been lower than their margins to-date. So we've also reflected that in our numbers.

Okay. And then maybe just one last one on near-term trends. It seems like a lot of the vendor partner community has -- in commentary has suggested a slowing environment. You probably saw NetApp pre-announcement, for example. But the broader of our channel hasn't really seen it and your fiscal year guidance suggests that profit dollar growth is actually going to accelerate on a year-over-year basis in the back half of this year organically. So just maybe hoping that you can touch on the disconnect on what we're seeing. The vendor some of the vendor partners seeing some slowing yet your back half guidance is still pretty robust. Thank you.

Yes. It's been a little bit mixed as you basically stated there Adam in regards to some of the -- on the storage front NetApp of course, which is a key partner of ours. And what we've seen really is just maybe a little more slowness in making decisions on that. We haven't seen the loss of business this example with NetApp just maybe a little bit slower to make decisions. But then when I look at our overall cloud and data center business, it was actually very strong. Network inventory is strong. There was good -- actually very good growth in the data center business for us in the quarter. So I think it's a little bit mixed dependent upon the situation. So we stand by the fact that we still see pretty good stability from everything we can see in the market. What the tariffs might -- may or may do in the back half is still in question. To-date we've seen really no impact on that, but that could have some impact as we go forward into the second half.

Okay. That’s helpful. Thank you very much.

Thank you. Our next question is coming from Matt Sheerin of Stifel. Please go ahead.

Yes. Thanks. Good morning. Just regarding the strong gross margin in the quarter particularly in EMEA which I think was the first time you hit a 17% margin there. I know that it seems like that June quarter seems to be a strong margin quarter historically for Europe. Is there a particular reason, or is that sort of a one-off? Because if you back into your EPS and revenue guide for the year it looks like your gross margin will not be improving from here. So could you just give us more color on the mix there Ken both EMEA and North America?

Should I get?

I'll have you touch on it Glynis first.

Okay. So in EMEA specifically it is the -- the second quarter is Microsoft event. And in EMEA our business is more heavily weighted towards software or software-related products, the cloud specifically. You'll notice when we talked about the results in EMEA we said that the top-line decline primarily related to more cloud and software solution sales as opposed to product sales. So what's happening in EMEA is a conversion of on-prem software to the cloud, as well as more cloud solutions that they're actually selling that's resulting in the higher gross margin that you're seeing there. So, no -- the second quarter is always our highest quarter margin performance. It's typically not always, but typically our highest gross margin performance and I wouldn't anticipate that the 17% -- I know that the 17% in Europe is not going to be consistent for the rest of the year. But they had an outstanding quarter all operationally driven and through the focus that they have on Microsoft solutions that are in demand in the European market.

Got it. And so would you say then that the gross margin improvement in North America is not -- I mean obviously Microsoft plays a part of that, but it seems like particularly with data tech that you are seeing margin expansion because of the solutions business?

We are seeing margin expansion in North America because of the solutions business. So our Insight-delivered services grew at a faster rate than our overall kind of agency fees, if you want to think about it that way we report services. And we said services grew 10% in North America as an example. Within that number the services component, the Insight-delivered services component that grew at a faster rate and that is attributable to the success that we're having with our solution -- the sales into our solution areas and a little bit of cross-sell that we are starting to see flow through from the Datalink acquisition. Do you want to add?

Yes. And I'd say you're correct in that Matt, t in regards to the Datalink business was strong. The cloud and data center business actually did very well in the quarter as well. So we're seeing good success there. And as you know more design-oriented certainly comes at a higher gross margin.

Got it. And in the North America hardware sales, up very strong sequentially and obviously I would think some of that is coming from this PC refresh cycle. Could you talk about that and what you're seeing both on the public sector side and the commercial side?

Yes. On the public sector side, we're -- in the Fed space we're more skewed towards software. So we don't really take full advantage of that like we've seen some of our competitors produce some pretty good quarters. This last quarter in the public sector space with hardware we're more software-oriented, so we didn't have the same benefit there. But I would say that for the most part there's still a little bit of a backlog issue with some processor issues. We think we'll get through that by this quarter. On the device side with one manufacturer that is certainly muting our performance on the device side a little bit. We think that will resolve itself this quarter. But again most of our hardware growth was very heavily focused towards the data center. So we're really pleased with that performance and the investments of course that we've made in that area. Again, we see that the device side of the business is continuing to grow nicely. We think there's still more room to grow there with obviously the Windows 7 of course coming to end of life. We think that will continue supporting the growth that we've seen for so many years now continuing for the device side of the business.

Do you get a sense Ken of what percentage of your customers are not compliance to the newer operating systems and have to be by January?

It's really hard to get a sense for that. I mean of course there's many clients that won't even migrate to that. They'll continue to stay on Windows 7. So hard to get a sense for what those percentages are because they're a little bit, so I'd hate to quote a number because I've heard all sorts of varying numbers that we're about halfway through to there's still another 60% to 70% left. So hard to really determine what that real number is.

The other thing I would add Matt is that historically at Insight, we have typically seen our refresh cycles related to a Microsoft change like Win 10 happened later, ultimately because our large enterprise clients have an IT infrastructure such that they can afford to handle their -- any needs that come up without necessarily having to rely on Microsoft. So if you remember going back to the Windows XP end of life, our transactions in terms of the increase in our devices' sales came about six to nine months later than the standard marketplace just because our clients do their own internal evaluation and take a little bit longer before they pull that trigger. But we would expect going into the second half of 2020 to see some impacts from that refresh.

Okay. Got it. Thank you.

[Operator Instructions] Thank you. At this time, I would like to thank everyone for their participation. You may disconnect your lines at this time and have a wonderful day.