Greetings, and welcome to the Insight Enterprises Third Quarter 2019 Operating Results Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Glynis Bryan. Please go ahead.

Thank you. 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 September 30, 2019. I am 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 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 our website at insight.com. An archived copy of the conference call will be available approximately 2 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, November 6, 2019. This call is the property of the Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of the Insight Enterprises is strictly prohibited. In today's conference call, we will refer to certain non-GAAP financial measures as we discuss the third quarter 2019 financial results. When referring to these measures in today's call, we will refer to them as adjusted. These measures include adjusted earnings from operations, adjusted diluted earnings per share, adjusted free cash flow and return on invested capital. These adjusted measures include -- exclude intangible, amortization expense, acquisition-related expenses, severance and restructuring expenses and amortization of convertible debt, discount and issuance costs. You will find a reconciliation of these 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 growth rates are discussed in U.S. dollar terms. Additionally, any reference to our core business, exclude PCM's results subsequent to the acquisition. 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 3. Ken?

Hello, everyone, and thank you for joining us today to discuss our third quarter 2019 operating results. In the third quarter, we continue to execute against our strategy to deliver IT solutions to our clients globally, leading with services and solutions that drive business outcomes for our clients. In addition, we closed the PCM acquisition on August 30. In 2 months after the acquisition, we remain excited about the opportunity to drive growth in our expanded client base and footprint. Now turning to the third quarter results on Slide 4. Consolidated sales were $1.91 billion, up 9% year-over-year, including 1 month of PCM results. Gross profit was $276 million in the third quarter, up twice the rate of sales at 18% year-over-year, including 6% growth in the core business and the addition of PCM. Gross margins were 14.4%, up approximately 100 basis points year-over-year, driven by strong cloud and services growth in the core business and the addition of PCM. Consolidated selling, general and administrative expenses were $222 million in the third quarter, up 21% year-over-year, including both organic growth of 8% and the addition of PCM. All this led to adjusted earnings from operations of $59 million, an increase of 7% compared to last year's third quarter. On a GAAP basis, earnings from operations decreased 11% to $44 million, driven by approximately $6 million of PCM acquisition-related expenses, $2 million of PCM intangibles amortization expense and integration and restructuring expenses recorded in the quarter. Adjusted diluted earnings per share was $1.10, an increase of 10% year-over-year. On a GAAP basis, diluted earnings per share was $0.76. Our third quarter results reflect our strategy to improve our gross margins by leveraging our 4 solution areas to optimize our business mix in higher-margin categories, including cloud, solutions and services. This led…

Thank you, Ken. I'll start on Slide 10. I'd like to highlight changes we've made to our adjusted earnings from operations, adjusted net earnings and adjusted diluted earnings per share calculations reported today. We have historically excluded severance, restructuring, acquisition-related and onetime costs in our adjusted metrics. Starting in Q3 of 2019, we're excluding the amortization of intangibles from our adjusted results. In the third quarter, we excluded approximately $6 million of amortization expense from our adjusted metrics. In addition, as is customary, our convertible notes were issued at a discount par value to effectively prepay debt issuance costs of proceeds and to the -- to growth of the below market cash coupon on the notes. These amounts will amortize to interest expense and increase the reported convertible debt balance over the life of the note, and we will exclude this noncash interest expense from our adjusted operating results beginning in Q3 and going forward. We believe these changes in presentation will give investors a meaningful comparison of the cash-based operating results period-to-period and will allow for meaningful comparisons to results of our competitors. To ensure comparability, we will make applicable adjustments to prior period results as well. Moving on to Slide 11 with -- in North America. In North America, net sales were $1.5 billion in the third quarter, up 10% year-over-year. The core business continue to see less spending for hardware products by select few existing clients, which drove the top line down 2% year-over-year. For the combined business, hardware sales increased 7% year-over-year driven by PCM. Software sales increased 14% year-over-year, and services sales increased 26% year-over-year, in the third quarter, including higher sales of cloud solutions and Insight delivered services primarily in the core business. Gross profit in North America was up 22% year-over-year, and gross…

Thank you, Glynis. Moving on to Slide 17. With respect to our full year 2019 outlook, included results of PCM for the last 4 months of the year, we expect net sales to increase between 9% and 11% compared to 2018. We expect diluted earnings per share for the full year of 2019 to be between $5.45 and $5.50. This outlook assumes an effective tax rate of 25% to 26% for Q4 2019. Capital expenditures of $70 million to $75 million for the full year, including the purchase of real estate in the fourth quarter of approximately $48 million and an average share count for the full year of approximately 36 million shares. This outlook excludes intangibles amortization expense, acquisition-related expenses, service and restructuring expenses and amortization of convertible debt discount and issuance costs during the first 9 months of 2019, and those that may be incurred during the balance of 2019 and assumes no further purchase -- repurchases of our common stock over the balance of the year. This outlook is equivalent to an adjusted earnings per share of between $4.90 and $4.95 under our previous guidance methodology used in the second quarter and now includes PCM's operations, intangibles, amortization expense and additional financing costs for the full quarter. Thank you again for joining us today, and thank you for all the teammates across the globe for their performance in the third quarter. That concludes my comments, and we'll now open your line up for questions.

[Operator Instructions]. Our first question today is coming from Matt Sheerin from the Stifel.

Just a couple of questions. Just first regarding the contribution from PCM. I know you talked about growth rates, could you just give that apples-to-apples number? What was the contribution in the quarter?

So it was only -- we only had PCM in the quarter for 1 month. It was $172 million of revenue, $28 million of GP. And essentially, when you net -- and that had a small contribution at the EFO line, but when you net it out, it was less than $0.01 in terms of total EPS in the quarter because of the interest below the line. And then [indiscernible] it's number or not, but as you go through the P&L, you end up with less than a penny of EPS.

Okay. That's helpful. And then you talked, I think, Ken, about the expectation for -- I know you did, Glynis, about gross margin being down in the fourth quarter due to seasonality in North America. PCM, as you've pointed out, has higher gross margin. So is that a function of the seasonality in that business too?

Yes. So the question that we -- the comment that I made regarding fourth quarter was specifically related to PCM. So if you look historically at the PCM business, their fourth quarter has always been 100-plus basis points lower than prior quarters. And my comment was related specifically to looking at expectations for PCM. Remember that their gross margin in the fourth quarter has historically been lower than other quarters. I'm not making any comments about the base Insight business.

Got it. Okay. And then Ken, you talked about relative strength in IT spending, still pretty good demand in North America. Could you give us some further insight into the hardware segments, particularly, on the storage side where we are starting to hear from some peers and distributors of a bit of a pickup after a kind of a low or weakness for a couple of quarters?

Yes. Yes. I think -- and you've seen a lot of the data, of course, and some of the major suppliers out there in that regard. So I would say that the business continues to, I think, to gain momentum there. It certainly had gone through a lot, as you saw, but I think they're certainly -- that is coming back, and we're seeing some good strength across some pretty important vendors for us. So overall, it's not across the Board, it's in pockets. But I'd say, overall net-net, we are definitely seeing some pickup in the storage area.

Our next question today is coming from Marc Wiesenberger from B. Riley.

This is Kara Anderson on for Marc. Just the first question that I had is around the property purchase for the new headquarters in Arizona. I'm just wondering if there are any other plans for real estate -- for the real estate acquired through the acquisition of PCM?

So yes. Welcome back, Kara. What we have planned, PCM owned 5 buildings across the country. We're going to be retaining 1, and we will be selling 5 over the next -- within the next year -- 4 over the next year. They will have to be replaced with other facilities, but we will leverage the fact that they are significantly underutilized, get the cash out of those buildings and use that to pay down debt. 3 of them are in California. So it actually means that we should actually be able to recoup some significant dollars to pay down debt with those purchase sales.

Got it. And then just looking at the sales mix in the quarter now with 1 month of PCM, is that kind of a reflective of the mix going forward? Or how should we think about that with PCM?

The sales mix, you mean in hardware-software services, is that what you're talking about?

Yes.

Okay. Well, it was 1 month of PCM in that quarter. I think that their business is a little bit less in terms of revenue associated with services, but the hardware-software side is probably a little bit more weighted towards hardware than our businesses. So in third quarter -- in the fourth quarter, you should see a little bit more hardware associated coming from PCM and not that much impact on our services number going forward because they were smaller services as a percentage of total revenue.

Got it. And then can you just go back through the guidance -- the EPS guidance. I think you pointed out that underlying assumption for the core EPS guidance embedded in the $5.45 to $5.50 EPS guide. Is that unchanged from previous guidance? Or did the core shift around?

No. That is unchanged from previous guidance. In Q4, -- so I'll walk you through it. In Q2, we said $4.85 to $4.95, and we said that excluded PCM. What we're saying today is, for the fourth quarter, we're at $4.90 to $4.95, that does include PCM, but the contribution from PCM is nominal in that guidance. So it's still within -- as we view at the guidance range that we have previously expressed, we do have $2 million more of intangible amortization. Last time, we would've given you $4 million for intangible amortization in the guidance range that we provided. We now have $6 million based on our preliminary assessment of the net asset values. So that's the change, I guess, in the overall guidance as you get to that $4.90 to $4.95 number.

[Operator Instructions]. Our next question today is coming from Paul Coster from JPMorgan.

This is Paul Chung on for Coster. So on the -- just a follow-up on the kind of guidance range, probably the bulk is from some amortization of add-backs, but just wanted to get a sense it's tackling, maybe, I don't know, anywhere between $0.15 and below is from the core business, is that the right way to think about it?

I'm sorry, you're talking about the impact of amortization expense in the $4.40 -- the $5.45 to $5.50 number, is that your question?

Yes, that's correct. I think it maybe around, I don't know, $0.40 kind of benefit from the add-back, is that correct? And then just wanted to get a sense for putting a number around the kind of the core business benefit?

I'm sorry, just give me a second. In Q3, on a year-to-date basis, the add-back for intangible assets. So I'm looking at the schedule in the back. So I would tell you the add-back for intangible assets for the 9-month period was...

Around $0.28, is that correct?

Yes. Yes.

All right. So if I take...

And we are going to have an incremental $6 million in Q4 related to PCM. Sorry, in 2019, if you -- there is a slide in the deck in the appendix, Slide 19. And if you look at Slide 19, the intangible -- the stock -- sorry, the EPS associated with intangible amortization 9 months of 2019, it's $0.38. I think you said, $0.28, it's $0.38 before tax. And we are going to add $6 million, which is roughly $0.12 to that number for PCM plus whatever the normal quarterly amortization was before that.

Okay. That's clarification. And as we think about kind of the normalized run rate from -- for some key operating items. Was it 3Q contribution in OpEx? Was that just 1 month? Or was it a full quarter impact? Or -- just wanted to get your thoughts on how to think about the combined business OpEx kind of run rate on a quarterly business or even on annual basis for the combined business?

So the impact that you saw for PCM in September was just the impact of 1 month of their OpEx or revenue and gross margin -- gross profit included in our numbers. We will have 3 months of PCM in the fourth quarter, and we will start realizing some synergies, not many, but we'll start realizing some synergies around the -- mostly the corporate cost that start going very effective with the acquisition. So I can't give you a percentage number in terms of what that would translate to in terms of a run rate for OpEx, which I think is what you're asking before?

Right. Right. Okay.

If you look at what we told you between EFO and gross margin for PCM, that's a 1-month impact. I would assume that if you get that impact for the quarter and then maybe a slight discount for some synergizes, that would get you to a run rate for PCM in terms of [indiscernible] coming in, in 2020.

Okay. And then kind of on a high-level last question. Some purchasing decisions, are you seeing kind of more interest in this trend of hardware as a service, which is kind of being offered by certain large OEM partners business? Does this -- how does it kind of impact your business? And do you see that accelerating from what your customers are saying?

Yes. Thanks of the question, Paul. This is Ken. Yes, we definitely are seeing. As the world starts to move more and more towards subscription-as-a-service, certainly in the software front, we're starting to see it also apply itself towards hardware. So there's some innovative programs in place. I'd still say, it's pretty early innings in that regard from some of the partners that we deal with as far as the traction. We're seeing a good amount of the course from the storage front, which Matt had sort of alluded to. There is certainly some of that happening in a pretty strong way there where they're all sort of looking at opportunities to provide choices for clients in order to provide it software-as-a-service or on premise. So that's definitely a trend, but it's -- again, it's still early to give you any kind of data points yet.

Thank you. We reach end of our question-and-answer session. Now, ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.