Ladies and gentlemen, thank you for standing by and welcome to the Insight Enterprises Third Quarter 2020 Operating Results. [Operator Instructions] I would now like to hand the call over to your speaker for today, Ms. Glynis Bryan. Please go ahead, ma'am.

Thank you, Debra. 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, 2020. I'm Glynis Bryan, Chief Financial Officer of Insight, and joining me today 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 by 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, November 3, 2020. This call is a 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 non-GAAP financial measures, as we discuss third quarter 2020 financial results. When referring to non-GAAP measures in today’s call, we will refer to adjusted earnings from operations, adjusted diluted earnings per share, and adjusted return on invested capital. You will find the reconciliation of these non-GAAP 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 discussed are 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 during this conference call are subject to risks and uncertainties that could cause our 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 periodic 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 third quarter 2020 operating results. I'm pleased to report that because of our dedicated team, resilient business model and the PCM acquisition, we delivered another quarter of double-digit adjusted earnings from operations growth year-over-year in the third quarter. The demand environment continues to be challenged but we focused on answering our clients’ most pressing IT needs while helping many to plan for investments needed to support the businesses as the economy recovers. During the third quarter, we saw a double-digit growth in services and cloud solutions which improved gross margins to a new third quarter record. And when combined with the positive effect of the acceleration of our PCM integration helps us achieve adjusted earnings from operations growth of more than 20% year-over-year. Now, turning to the third quarter results on Slide 5. Consolidated net sales in the third quarter were $1.94 billion, up 1% year-over-year reflecting two additional months of PCM and the results in this year since the acquisition closed in August 30, 2019, and lower sales in EMEA and APAC. We focused on growing our services and solution business mix which helped drive gross margins up 150 basis points year-over-year to 15.9% in the third quarter and adjusted diluted earnings per share was $1.38, up 25% year-over-year and on a GAAP basis diluted earnings per share was $1.10, up 45% year-over-year. Within these results, gross profit generated from cloud solutions was 18% of our consolidated gross profit over the past 12 months. And finally, our business has generated $462 million in cash flow from operations in the first nine months of 2020 reflecting certain payment timing differences with partners and the benefits of our disciplined cash management practices. Turning to Slide 6, during the second…

Thank you, Ken. As Ken noted, we are pleased with our global team’s execution in the first nine months of 2020. So far this year, the team has successfully integrated the largest acquisition in the company's history and has delivered integration savings well ahead of the plan - of the planned timeline. In a sluggish demand environment, we’re focused on selling services and solutions which help drive gross margins up more than 100 basis points year-over-year. We reduced our operating cost to meet current demand and accelerated the integration of PCM which allowed us to drive adjusted earnings from operations growth of 15% year-over-year in the first nine months. And to complement with strong earnings growth, our business generated record level of cash flow from operations so far this year. As a result, in the third quarter, we paid off the balance outstanding under our ABL facility. We know have the entire $1.2 billion facility available to fund the future growth. We set a high bar for ourselves coming into this year pre-COVID. And while earnings are down versus our original expectations, our significantly stronger cash flow performance allowed us to deliver adjusted return on invested capital of 12% plus clearly demonstrating the resilience of our business model and the operational discipline we have installed across the business. Moving on to slide. Exiting the quarter, we are comfortable with our current leverage position of less than 1 time debt to cash flows or EBITDA. Under our ABL agreement, our primary compliance covenant is a fixed charge coverage ratio, which includes trailing 12-month EBITDA coverage over capital expenditures, taxes, and cash interest. As of September 30, we’re at 4 times against the minimum requirement of 1 time and we’re confident we can support our capital requirement and liquidity needs. As we…

On to Slide 15, we remain committed to our long-term priorities discussed at our Analyst Day discussed at our Analyst Day last fall, which include continue to innovate in order to capture share in high growth areas such as the cloud and the intelligence edge, developing delivery solutions that drives better business outcomes for our clients, expanding and scaling our business and strategic clients and end markets. And lastly, continue to optimize client experience and our execution through relentless focus on operational excellence. For the remainder of 2020, we believe the overall IT market will be challenged given the current COVID crisis and its adverse impact on the global economy. We've taken appropriate steps to reduce our discretionary spending and ensure we have access to capital to support our short term operating plans and are confident we will weather this tough economic environment and emerge healthy on the other side. We currently expect net sales for the fourth quarter will be between $2.1 billion and $2.2 billion and adjusted diluted earnings per share will be between $1.45 and $1.55. For the full year, net sales are expected to be between $8.1 billion and $8.2 billion and adjusted diluted earnings per share expected to be between $5.88 cents and $5.98. Our outlook assumes a tax rate of 25.5% for the fourth quarter. This outlook excludes acquisition-related expenses, severance and restructuring expenses incurred, amortization of intangible assets, and amortization of convertible debt discount and issuance costs during the first nine months of 2020, and those that may be incurred during the balance of 2020. Due to the inherent difficulty of forecasting all these types of expenses, which impact net earnings and diluted earnings per share, the company is unable to reasonably estimate the impact of such expenses if any to net earnings and diluted earnings per share. Thank you again for joining us today. And thank you for all teammates across the globe for their support of the company, our partners, and our clients. Be safe and we look forward to talking with you again next quarter. That concludes my comments. And we’ll now open up your line to your questions.

[Operator Instructions] And your first question comes from Adam Tindle with Raymond James.

Ken, I just wanted to start on the Q4 guidance and appreciate you providing that. It looks like it's going to imply that revenue is going to be up somewhere around high single digits on a sequential basis, which is pretty nice uptick kind of reminds me of prior years where we had larger budget flushes. So, maybe you could just touch on how you’ve built those expectations. I know there’s been a couple of quarters in a row where the press releases are citing impact from COVID on internal budgets. But to an outsider, that just doesn't seem overly conservative. So, it would be helpful just to understand how you built up those expectations?

Yes. Thanks, Adam. Appreciate that. Yes, in regards to the traditional sort of budget flush for Q4, I don't really believe that's in the cards. Now, I think CFOs are certainly taking over quite a bit of the control of spending in these environments. So, I don't believe that companies are looking at budget flushes. That’s not certainly what we're talking about. But when we look at sort of the backlog going into Q4 and we look at just the trending that we're seeing, certainly, public sector, we'll have nice growth in Q4. When you look at the federal government, state and local as well as the education market, we’ll certainly grow very, very nicely. And then, we are starting to see some enterprise clients starting to look to spend to get back to more of a normalcy, if you can call it that environment. So, all that put together, of course, gives us the confidence of the guidance we have provided for Q4.

Maybe just as a follow-up on the PCM savings. Obviously, nice job tracking ahead of where you had expected to be. I think $60 million to $65 million exiting Q4 is up again. I just wanted to ask why not revise up the total $70 million cumulative target. Is that because you're just kind of getting through the savings faster and the total is unchanged or you’re finding additional areas and there’s an opportunity to move that cumulative $79 million up?

Yes. I’m going to comment as well. I think your commentary is correct. We're able to really accelerate as we focused on that pretty significantly this year. Sort of the wildcard know of course is the real estate aspects which we certainly would have expected in the normal environment. We've probably seen more of those dollars in the next year or so. That could change obviously based upon the whole commercial real estate environment. So, that sort of tempers us a little bit to keep at the 70 number that we quoted. Glynis, do you want to add anything to that?

Yes. I think you kind of covered it. I think what we are at work, we made a decision to try and accelerate the savings to get to the $70 million as quickly as possible. Part of it was we have the environment of COVID that allowed us to do that in terms of right sizing the operation for the volume of business that we were seeing. So we took advantage of that to accelerate some of the savings. Can’t comment about the real estate in addition to what we're trying to sell. We also look at some savings in subsequent years as we come out. We made a decision not to buy out of those leases - buying out of the commercial real estate at least to-date is expensive. So, we made the determination not to do that, but just to keep them operational until we see the - until the lease term expires. So we’ll get an incremental savings, couple of hundred thousand in the year going, forward but not anything significant as those lease will term out.

And your next question comes from Matt Sheerin with Stifel Nicolaus.

Just following up on Adam’s question regarding your relatively solid guidance for Q4. Could you talk again in terms of the where – where you see that spending going. Is it continued to be work from home inclined devices or is that largely played out? And are you seeing a shift more toward the on-prem infrastructure products that obviously have been delayed for a couple of products.

Yes. Thanks, Matt, the question. Yes. In regards to –I think you know that from a hardware perspective, half of the revenue actually comes from devices in our business and in the churn overall. So, devices are just basically play that. There is no question that Chromebooks will accelerate here into Q4. It’s a lot of units. That’s about 30% of the unit volumes for devices. About 13% of the revenue volumes come from Chrome because of low ASPs. So, that will certainly continue to accelerate and I think that will actually accelerate into Q1 from what we can say as there are some shortages – certainly significant shortages out there for those devices. For the public sector piece, I think we’ll certainly be a strong growth trajectory for – certainly for Q4. As far as the infrastructure piece, I’d say it’s a little bit mixed as far as certainly some companies are recognizing that they have to digitize their business and as companies start to digitize their business to become more modern. They also have to upgrade their infrastructure to become more modern, whether that’d be public side or whether that’d be private infrastructure. So, certain clients are looking at that and making those investments and others are still a little bit more like, hey, that’s what you see. Let’s just see how this going to play out as far as COVID concerns. So, we have invested in that area and in regards to the infrastructure side of the business with resources. So, we’re going to position ourselves to make sure that we’re in a position to capture that rebound when it does occur. And as you know, this is when you go through the 10-year cycles we’ve been on, you go back to the Great Recession in 2019 where we all saw pretty substantial double-digit declines in 2009 and 2010, we saw 17% growth. Go back 10 years before that with the dotcom, same sort of trajectory. So, we do believe that might - it's difficult to put these investments off for a long time and but that they will certainly start to recover. We're not sure when that's going to occur in 2021, but we're starting to position ourselves to take advantage of that.

And on the enterprise side, are you seeing – you talked about client device strength on public sector with Chromebooks or are you seeing the same thing on the enterprise in terms of the commercial notebooks or is that weaker now?

We are seeing that as, again, it's very client dependent. We are seeing certain of our clients that on the enterprise side certainly coming back to life here from a device point of view here.

And then, sort of backing on your EPS guidance, in revenue, it implies that gross margin may be down a little bit, but still up significantly, 70 basis points, 80 basis points plus from last year. So, that positive mix shift that you've seen in the last couple of quarters, is that continuing in terms of cloud services netted down software revenue, that sort of thing?

Yes. That's correct, Matt, you've got that right.

Somewhat muted, Matt - hardware.

Okay. In the Chromebook margins are, I would imagine, lower than the rest of your hardware.

Yes.

Okay. And just lastly, you talked about some headcount additions and adding to the sales force. Is that happening now and does that impact OpEx? Because I would imagine on OpEx, given that you still have some discretionary spend on hold, it's not going to really move much from where it is now. But you expected that the sales count increased the impact of that at all?

We do expect the increase in sales in technical resources to impact that. Probably not so much in Q4 but we’re starting this investment over the last quarter and going into Q4. So, it will be a bigger impact going into 2021 because we want to make sure that we're ready and prepared to address the improvement in the economy that we anticipate in 2021. When exactly? We don't know but we anticipate an improvement in the economy 2021 and some of the investments that we're making now if we’re well positioned to take advantage of that in 2021.

Okay. And you gave us the PCM integration and synergy numbers. But is any of that – does any of that play out in the December quarter in terms of lower OpEx because of that?

So, yes. Well, we're going to end up exiting the quarter at $60 million, $65 million coming out of Q4 and there's a little incremental to that $55 million in Q4, a little…

Okay.

Increment.

All right.

Complementally.

And your next question comes from Anthony Lebiedzinski with Sidoti & Company.

So, other than Chromebooks, are you guys seeing any other supply chain dislocations? Anything to call out there?

Yes. Thanks for the question, Anthony. A little bit on the display side glasses, certainly under a lot of pressure. So, dependent upon, you know, obviously whether it’d be touch yourself forward for certain products in notebook areas and certainly on the Chrome side. So, glass is certainly a little bit of shortage. There still a little bit of tough situation on the processor side dependent upon where you are on that front with AMD and Intel as there’s obviously significant demand in and that area. So those two areas, let’s say, recovered due to the most areas that we're seeing certainly constrained that lead mostly to device type of constraints that we're seeing. Not too much in the other areas of the business. But of course, displays are impacted as well.

I know Europe is not a huge part of your business but they’re doing some lockdowns there in various countries there. How should we think about the impact of lockdowns in some of the countries in Europe as far as the impact on your business?

Anthony [indiscernible] U.K. and sort of Germany and France pretty much going back to I think the way the world was for them in April. So it’s not like we haven’t seen this before. And they’ve weathered those storms pretty well back in the spring. So we don’t - right now, we're not calling for any significant change in what we're seeing there. I think they’re just going back to the environment where they were, but I still believe they’re all now much more functional than we were in April in regards to how we conduct business. So, we're not projecting or anticipating any significant decline there at least at their stage and this case sort of announced that before weeks sort of situation and they extended. But again, nothing that we're projecting have a significant impact into our numbers.

The next question comes from Paul Coster with JPMorgan.

Thanks for taking my questions. Two really, first the [indiscernible] $30 million to $35 million of variable expenses that you expect to be added back next year. Just can you explain that a little bit better. Is that just all things being equal or I mean, as it is or does the business strategy and growth model for that speak the case or anything else you can provide by way of comment.

Sure. It is actually a combination. So, there's some things that will come back in regardless of growth, but the specific larger items would be depending what happens with regards to travel. We've made some decisions around, so there’s very little travel in 2020. We made an assumption about what we think travel would be going into 2021. So, some savings, but up from where we are today. We've made some decisions around investments that we're making in the business. There are other discretionary areas that we pulled back on in 2020 that will come back into business. Bonuses and executive comp will be impacted by performance in 2020. So, the combination of all those pieces, we assume going into 2021, will come back into the business.

So, down year, would that range still apply or would you look to…

It depends on how we budget. If it’s a down year, would that range still apply? I think that there's certain expenses that will come back into the business even if it is a down year. How we address the down year would then be in a different manner. But if it's a down year, there are changes that we made this year that were one-year changes and if there is a downturn, then we will have to figure out other ways to address the downturn.

The other question I have is the cloud net out, that’s taking place on net sales. Can you quantify the approximate revenue headwind that comes with that higher-margin business? I mean, for instance, if it wasn’t netted down, how much revenue would you…

Right. It would take it down - I guess, we would have had revenue growth, I mean, higher revenue growth in software. The percentage of our business that is netted is in the 35% to 36% range on average. It’s higher GP sorry - the netted business, pure netted business, is about 35% to 36% of our total GP. That's higher in Q2 given the Microsoft year-end and the higher software component that we typically have associated with Q2, about 39% then. But, on average, there are no components from our business is about 35% to 36%. And with hardware being down to-date in the results year-over-year, that is lower margin, that has helped boost our margins as you’re seeing in our results year-to-date.

But you think you would have delivered top line growth quite easily if you hadn't been netted out. I’m just trying to kind of…

Yes. Yes. It would - yes, it would have - yes, we would have delivered top line growth without the netting. I myself kind of thought that as we’ve been netting for the past couple of years that eventually we get to kind of some run rate associated with this. But cloud and digital are the winners in COVID. It’s accelerated. And I actually think that it’s accelerating the conversion that we have seen to-date from on-prem, cloud-related solutions to off-prem - on-prem non-clouds, off-prem cloud solutions; and that’s going to continue going forward and it will continue to impact our revenue.

Sort of last question, Ken, actually I think I got the sense that edge is - and hybrids are the biggest drivers but then I kind of got a little bit lost with your commentary around your client side, hardwares, well, is it all three, which is kind of - which is full strength then in terms of the growth at the moment which is kind of driving things the most if any of them?

From a hardware point of view, it’s clear that devices is what’s driving the growth in the industry right now from a channel point of view. That's very clear. There will be positive growth in devices this year and then, of course, there will be declines in server storage, networking, and the other categories from a hardware perspective. So, certainly devices would be top of the list. We're still, of course, very committed to investing in the intelligent edge, the IoT areas of the business. I think that’s been a little bit slowed down by COVID where companies just are, you know, hustling down just to try to figure out, you know, how to keep their business is intact and not [indiscernible]. So, but that will come. There's no question about that as AI continues to drive the marketplace going forward. So, we're - we’ll still continue to invest there. So, that was probably - that was certainly more muted than we would have expected in 2020. But we're confident that that certainly will recover in return.

Your next question comes from Marc Wiesenberger B. Riley Securities.

Can you talk about the price sensitivity across customer cohorts and maybe - and product categories? Are you seeing demand become kind of any less elastic? And what are your expectations for the duration of any change in behavior?

I would say that, you know, the pricing pressure is always been the marketplace. But, I think, it's actually pretty rational for the most part in this environment where there's been certainly a lot less volume and demand. So, it's certainly a competitive environment but we don't see it being crazy by any means or anything like that. And obviously, our gross margins certainly reflect that. So I'd say, it's been it's been pretty rational at this stage. So, nothing that we would say would be a concern at this stage.

Understood. Are you seeing big changes in customer preference for vendor consolidation? And maybe which product categories is the lowest hanging fruit you're seeing in terms of gaining share?

So, on the vendor consolidation front, a couple of questions - a couple of areas in that so, certainly we see from a client perspective that all of our clients have been driving force, we want to do business with less partners as they're trying to streamline their business. And that's even more indicative in this environment where their resource constrained and everybody's working from home. So, they're trying to simplify their operations and do business with less people where they can. So, that consolidation I think is only accelerating during the COVID crisis. So, I think that should favor certainly some of the larger players in the industry who have more breadth and more capabilities. We'll see how that continues to play out. So, I think that's definitely happening. I think you're seeing it on the, from a vendor point of view from a PC front. There's no question that the desktop notebook business is consolidating to the large players and that's been going on for quite some time. So, the Dell’s, the HP’s, the Lenovo's, the Apple’s are certainly garnering more and more of the share of the business. So, I think that's continuing as well. And I think you're seeing the consolidation efforts of course even on the infrastructure side with all the acquisitions going on out there in the marketplace. So, I think that's just going to continue to accelerate from that point of view. And then Marc, what was your - the second part of your question?

Just if the vendor consolidation provides an opportunity to take share?

Yes and I think it was the low hanging fruit. What was that?

In product category in terms of gaining share?

Which product categories? I think you know from a product category - want to do from a share point of view, the biggest area of course again being notebooks. By the way prior going to the COVID, it was about 52% desktop environment, 48% notebooks and of course now it's like 80% notebooks. And I don't think that's going to change. So, I think that area is certainly the biggest area of the business and also probably the easiest for companies to picture on.

Are you seeing a change in preference in terms of duration of agreements and probably within the service segment I would imagine the most? And how should we think about maybe any potential impacts on the P&L in the near and medium term from the change in duration of agreements?

I didn't know that I would say that we're necessarily seeing any change in duration of agreement as we've made the move to the cloud and more of a subscription-based model. Agreements have been anywhere between 12 to 36 months depending on the particular vendor and - how they do it. Most agreements are cancelable ultimately so it's not necessarily so term dependent in some cases. There is a move by a couple of vendors to have terms and not have the agreements, the cloud agreements be non-cancelable. That may be a trend going forward, but it doesn't have a significant impact on us in that regard either going forward. But I haven't noticed people saying I used to want a 12-month term and now we're switching to 36 or vice versa. And that's not something we've heard coming back from the sales force at this time.

And it does come in - it comes in a measured way for us Marc, for our business. So it's not like its one big fell swoop that would adjust our revenue and our profit streams. So it's been occurring over the last sort of five years in a very sort of measured way. That's why I don't think you're seeing - it's not like Adobe when Adobe is flipped.

Yes.

Their business in a quarter or two, it’s happening in a much more measured way for us.

Understood, got it. And just final one from me, can you remind us kind of what levels qualify for kind of how you think of large projects? And how did that category performed sequentially and year-over-year? Thank you.

You mean services contracts, Marc is that what you’re talking about?

Sure, or also maybe large hardware purchase orders as well?

So I would say that for us, this year particularly one of the categories impacted the most has been those large hardware orders as clients have all kind of pulled back with regard to - usually around devices is what that would be where we do really lot of our client. Some of our clients typically have a software - hardware refresh cycle. I would say that, in 2020, many clients may have put those on hold. As Ken mentioned in his comments, we're starting to see a little bit of that of clients starting to reengage in that in the fourth quarter. So, I'd say that was the hardest hit category in that regard. In terms of large projects, I guess we would play typically I would say like sub-$10 million range when we're talking about a large project, not including all the hardware associated with it, okay. That could add on another - usually there's a 10-to-1 - sorry 5-to-1 pull hardware/software versus services - for each dollar services. I'd say that those this year, have also been constrained. And what we're seeing much more is on-prem - the move from on-prem to the cloud either that had infrastructure as a service that are not typically $10 million one-time hit that you see on our P&L. Those are slowing over time.

And your final question comes from Vincent Colicchio with Barrington Research.

Yes so Ken, the sales force additions, are these going to be fairly senior folks that could sort of ramp quickly as this business improves - seemingly business improves next year?

Yes, they are. So we’ve - this is a pretty good environment to hire folks because the - good folks are available. So yes very selective from a field point of view, but we are also additionally augmenting our inside sales team as well. And that tends to be a little less experienced folks that we - certainly less costly but less experienced to build that pipeline of talent as well. But it's really a combination. But yes, we are in a field side, we’re able to hire people that have experience, can bring books to business and clients relationships with them. So that's the goal and the objective that we've been on here.

And could you give us some color on your thoughts or your current thoughts on acquisitions that we're hearing over here into the PCM? Maybe talk about the pipeline and pricing in the market and sort of your thoughts about doing something in the near future?

Yes, I mean we're certainly making sure that we maximize and optimize the PCM integration fully, but we're always out there looking as you know, as we stated the PCM acquisition was sort of a two-year coding process, but they do take long. So, we always have a pipeline. And of course, the timing is not very predictable. It depends on the situation. So, we're pretty active, always looking at that. But for right now, we continue to look at acquisitions that will give us again, more talent that we need more tuck-in site acquisitions versus scale acquisition. Although, we're not opposed to any scale acquisitions but right now, we're making sure we maximize the full integration here. So, if we had complete control of the time and it would certainly - we wouldn't be doing a large-scale acquisition here and in the near term, but we're obviously always pretty active. I think the markets are pretty robust. I think many of the valuations are pretty reasonable at this stage of the game. So, there's - yes, there’s definitely more opportunity there and more rational pricing in the market as far as acquisitions.

Okay. Thank you. My other questions were asked.

Thanks, Vincent.

Thanks, Vincent. Welcome.

Thank you.

There are no further questions in queue.

Okay. Thanks for joining us today. Have a good week, everyone.

This concludes today's conference call. You may now disconnect.