Ladies and gentlemen, thank you for standing by and welcome to the Insight Enterprises Fourth Quarter and Full Year 2020 Operating Results Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation there will a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to Ms. Glynis Bryan, Chief Financial Officer. Thank you. Please go ahead, ma'am.

Thank you, Shelby. 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 and full year ended December 31, 2020. 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 our 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, February 11, 2021. 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 the fourth quarter and full year 2020 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 earnings before interest taxes, depreciation, and amortization also referred to as adjusted EBITDA, adjusted diluted earnings per share, and adjusted return on invested capital. You will find a reconciliation of these adjusted measures for 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 periodic reports and subsequent filings 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, thank you for joining us today to discuss our fourth quarter and full year 2020 operating results. This past year was one of the most challenging we faced as a company and as a society as a whole, from the difficulties of the COVID-19 pandemic and important social justice issues deserving our attention. We have navigated our fair share of complex experience together, and at Insight we did it while living our core values of hunger, heart, and harmony. We saw our values and actions around the globe demonstrated by our warehouse and distribution center teammates who tirelessly, bravely reported to work each day so essential workers and others had equipment they needed to fight against COVID-19. This, however, was further demonstrated as teammates across the company donated their time, talent, and finances to make a difference in their communities through 3D printing of face shields, [indiscernible] masks through donation and deliveries, hand sanitizing sourcing, and monetary donations to teammates in crisis. I could not have been more pleased with our teammates’ incredible display of culture and have never been proud to be part of our Insight family. In the fourth quarter, the demand environment continued to be challenged, and we focused on answering our clients' most pressing IT needs while helping many plan for the investments required to support the business as the economy recovers. During the fourth quarter, we drove double-digit growth in cloud and warranty solutions, which pushed gross margins to 15%. And we combined with the positive effect of the acceleration of our PCM integration, including the cost synergies, this helped us achieve adjusted earnings from operations growth of 12% year-over-year. Specifically, for the fourth quarter of 2020, consolidated net sales of 2.3 billion flattened year-over-year. PCM results were included in our full fourth…

Thank you, Ken. In the recessionary environment of 2020 where clients were focused on controlling discretionary capital investments, particularly for hardware infrastructure products, we focused on selling services and solutions which helped drive gross margins up 90 basis points year-over-year. We reduced our operating costs to meet current demand and accelerated the integration of PCM and this allowed us to drive adjusted earnings from operations growth of 14% year-over-year. And to complement our strong earnings growth, our business generated record level cash flow from operations. Today, we have the majority of our $1.2 billion debt facility available to fund future growth. While earnings and volumes are down versus our original expectations due to COVID-19, our significantly stronger cash flow performance helped us deliver performance ahead of our expectations with adjusted return on invested capital of 13%. This performance demonstrates resilience in our business model, and the cash management discipline we have installed across the business. Moving on to North America on Slide 12, fourth quarter net sales were $1.8 billion down 1% year-to-year due to decreases in hardware and services sales. Despite higher bookings going into the fourth quarter last year, we did not realize on the top -- growth on the top line for hardware due to continued supply imbalances across the channel and also client requirements to ship in 2021. As a result, we exit the year with elevated backlog that we expect will flare in the first half of 2021. Gross profit in North America for the fourth quarter was up 1% year-over-year driven by 10% increase in services gross profits. These results include strong year-over-year growth in warranty and cloud solutions, which also drove gross margins up 20 basis points year-over-year. Selling and administrative expenses decreased 5% year-over-year, and adjusted earnings from operations grew 13% year-over-year…

Thank you Glynis. We're pleased with our team's resilience in 2020 and believe our business is poised to recover strongly across each of the markets in which we compete. With respect to our 2021 outlook, we expect to deliver net sales growth between 4% and 8%. We also expect adjusted diluted earnings per share for the full year of 2021 to be between $6.60 and $6.80. This outlook assumes interest expense between 25 million and 28 million, an effective tax rate of 25% to 26% for the full year 2021. Capital expenditures of 75 million to 85 million including approximately 60 million for the build out of our new corporate headquarters, and an average share count for the full year of approximately 36 million shares. This outlook excludes acquisition related intangibles amortization expense of approximately 32 million and non-cash convertible debt discount issuance costs reported as part of interest expense of approximately 12 million that assumes no acquisition related or severance in restructuring expenses. To assist with your modeling, we have posted a schedule on our website on the Investor Relations page that shows the expected amortization expense and non-cash convertible debt discount, and issuance cost by quarter for 2021. Thank you again for joining us today and want to once again thank our teammates across the world for everything they do for Insight, including the resiliency of our culture display this past year by their daily actions, wanting to be part of such an incredible team. That concludes my comments, and we will now open up the lines for your questions.

[Operator Instructions]. Your first question is from Matt Sheerin of Stifel.

Yes, thank you. And good morning, everyone. My first question Ken is regarding your commentary about hardware and about some lift in backlog and bookings there. When you talk about hardware, are we talking about continuous strength in client devices or are you also seeing an increase in bookings for infrastructure and on-premise projects? And just as part of that question, could you talk about any seasonal trends, it sounds like you've got backlog going into Q1, so should we assume that it could be better than seasonal to start the year?

Yeah, good question Matt, thanks for it. As far as the hardware, we are seeing that across certainly devices, as well as infrastructure in the storage servers, networking as well. So I'd say it's pretty balanced as far as the booking increases that we're seeing. And as we did mention, of course, we did come into the quarter with elevated backlog much due to of course, shortages that were existing and that couldn't be fully supported in at the end of Q4. So that certainly is leading to [indiscernible], although there are some still continued constraints in the market from a supply chain point of view that we're navigating through Q1 as well.

Okay, so…

Just one second Matt. So, we do expect that Q1 seasonally will be stronger than Q4. We're not saying that Q1 is going to be stronger than Q1 of last year. Just to be clear.

You mean in terms of year-on-year growth, it is sort of flattish? Okay. Very helpful. Okay, great. And then just on the infrastructure side, can others -- some of your competitors and distributors are talking about still really not seeing a lot of visibility in terms of companies coming back and doing the bigger projects because of shutdowns and that sort of thing. Are you getting any visibility that that should improve through the years, is it still early to tell?

It's too early to tell Matt, and we are certainly believers that it will recover towards the second half of the year for sure. And what drives that, of course, when we look at the cycles that occur in our business is that you can't put these projects off forever. And what has become clear for the pandemic is that all companies are becoming digital. There isn't any company that we talked to that isn't talking about becoming more digital. And in order to become more digital, it's not just a software solution, you've also got to make sure that you modernize your infrastructure, whether that be on premise or the cloud environment. So, that's where we see a lot of these projects coming to the forefront as many clients of course, last year, first focus was completely addressing how do we support from a collaboration point of view or people working from anywhere, that's still going on, but that's certainly much more mature than it was a year ago. So, I think now the companies are starting to look at their environments and understand how they're going to compete effectively going forward. And again, at the top of the list is how do we become more digital.

Okay, thank you. And just my last question, regarding the model, you gave us your -- the SG&A percentage for the year at 11.7. So it looks like backing into gross margin looks like gross margin could be up again this year and that would be a little surprising, given that the mix could skew a little bit more toward hardware, or are you continuing to see strong growth in services?

Matt, we would anticipate that gross margin is going to be flat year-over-year, specifically to your point about seeing the higher hardware growth in 2021 than we saw in 2020.

So flattened year-on-year, okay. Great. Thank you.

Your next question is from Adam Tindle of Raymond James.

Okay, thanks and good morning. I just wanted to start on the 2021 guidance of the 4% to 8% year-over-year growth. What are the assumptions embedded in this for devices in particular, you're lapping a very strong year for the category, I'm just wondering if you think they can still grow embedded in that 4% to 8% assumption? And if possible, could you quantify that backlog and maybe how much it contributes to that to give us some confidence in those numbers?

Yeah, and so overall as far as the forecast for the 4% to 8% growth, so how we look at it basically is that I think in general most economists are viewing the GDP growth will be anywhere from 3% to 4% again, depending what region you're talking about, but in that range. What we typically see of course in these cycles, is that IT will grow 2% to 3% faster than the GDP growth. So that's how we have come to the conclusions of the growth that we should certainly start to see. In regards to devices, certainly, when you look at our makeup of our business, 60% of it being hardware, the rest being software and services. So in the hardware category of that 60%, devices is certainly the largest segment. It's not the only segment, of course. There's a lot of infrastructure spend in that. But specifically on the device front, I do believe there's growth in devices coming and all the sort of OEM partners that we talked to, I think they feel the same way. There's certainly a lot of constraints you're hearing about in the marketplace. And I think what's driving that, of course, is that, as you saw that the Notebook category increased pretty significantly last year as its company went away from sort of the balance of 55% being Desktop, 45% being Notebook now you're seeing 80% plus being Notebooks. Notebooks, of course, come with a significantly higher ASP, and they also have a significantly higher refresh rate. So I think what we're also seeing is that, as we talked to our OEM partners is that many clients, of course, are looking at seeing where they might have sweated a Notebook asset maybe four years, they're starting to improve that and shorten that that cycle, especially as a little bit more wear and tear on these devices than there was before. So that sort of gives us the reason for optimism around certainly devices. The other thing that you'll always see is the fact that the channels always seem to do better in devices than the overall market does. That's always proven out. So, we certainly track that data. So, we do believe that there will be -- growth in devices won't be as substantial as it was last year, but it will be a contributor to that growth model.

Okay, and any way to maybe help us with the backlog, how much that represents in 4% to 8% or how much it is in dollars?

Yeah, we wouldn't get that granular on that Adam, but certainly, as I said, it is certainly a contributor and we are seeing positive indications of that. And as you know, there's, tremendous backlog in the areas like Chrome and so forth that are going to probably be constrained through second quarter.

Understood. And just a clarification, Ken I think, as you were talking about Q1, you were saying in your prepared remarks, I believe seeing above seasonal and I thought I heard you say up mid-single-digits in terms of Q1, but then, in response to Matt’s question, I think Glynis talked about Q1 being flat year-over-year. So maybe just help me with did you say out mid-single-digits in your prepared remarks or did I catch that incorrectly?

No, you got it right. What I said is in bookings is what I indicated in Q1, that we were seeing, booking rates year-over-year at this juncture in the quarter improve in that mid-single-digit range. And that translates us to be seasonal improvement from Q4 and flattish to last year’s Q1, which of course, as you know, is a pretty strong quarter with COVID coming on the scene.

Yes, yes, it make sense, its helpful. And last one for me, cash flow has been a continued bright spot, their total leverage is now getting to around one times, the balance sheet is healthy. I think you talked about 200 million more of operating cash flow coming. With that as the backdrop maybe just revisit the capital allocation priorities, does it make sense for another PCM size acquisition at this point?

Yeah, we'll certainly always continue to look on the M&A front, it has been a key part of our strategy. So we'll continue to do that at this stage, but certainly continuing to focus on the debt pay down, continue to focus on investing organically in the business which we're doing now, and we started to do in the back half of last year to invest in sales, client facing resources for both a sales point of view and technical point of view. So that's certainly been a priority for us. And you're seeing that a little bit in the SG&A increase as well. And then, of course, we'll look at always returning, dollars back to shareholders. So those continue to be our priorities.

Very helpful. Thanks Ken.

Your next question is from Paul Coster of JP Morgan.

Hi, thanks. This is Paul Chung on for Coster. Thanks for taking my question. So, great performance on free cash this year. When you say kind of normalization is seen some improvement in DSOs, maybe your cables come down a bit this year. And then as we think about the seasonality of cash flow, should we expect that very large kind of cash inflow in 2Q and then usage in the second half, kind of like 2020?

Yes, we wouldn't anticipate the change in the seasonality around the cash flow, because that that's driven by the business and the seasonal demands on the business. So that would be a good assumption Paul.

Okay, and then just on the guidance, the sales outlook spread is a little bit larger than usual. So I assume you are kind of baking in some COVID uncertainty, but what are some of the indicators you need to see to hit the top end of that range and then there's this guidance kind of assume a second half acceleration as the vaccine gets more widely distributed?

Yeah, I think you've got it right there Paul, with regards to the second half. Certainly, I think everybody's indicated that will be stronger, due to the fact that the vaccine is gaining momentum, certainly across the U.S. and in other countries. So that looks pretty optimistic. There are certainly still vaccine variants out there that are in question and concerning. So that might sort of needed to meet the lower end of what our growth guidelines are. But when you look at what occurred back in 2009, during the last sort of big decline that we saw in the economy and in IT, the rebound was substantial in 2010. It rebounded in the high teens sort of run rate. So if we get anything like that, I think the 8% I think is very, very doable. So that's sort of how we came up with the modeling. So I think you're correct in this sort of why there's a wider range.

Okay, and then just lastly, just to follow-up on the free cash flow, I mean, so your guidance, your sales is up, your margins are kind of expected to be flat, spending flat, so why wouldn't your free cash flow be up this year, I know you'd some CAPEX spend on the HQ but if you just do that, why couldn’t be slightly up, I know you expect some normalization but what was kind of driving some of that, if you could help us?

So partly it's because of the return to growth. Ultimately, as we grow, because we have that inverted cash flow cycle as we start to grow, we end up using more cash as we go into that growth cycle. So that's what's the primary driver. And as you saw in Q4, we had no debt, sorry, we had no debt under our ABL at the end of Q3 and going into Q4 we had $140 million of debt outstanding under our ABL. So that's also a use of cash that was also driving growth in some of the backlog that you're seeing that will flow through the business going into 2020 going into the first half of 2021.

Okay, that's helpful. Thank you very much.

Your next question is from Anthony Lebiedzinski of Sidoti and Co. LLC.

Yes, good morning guys. Thank you for taking the question. So, as far as the supply chain that you referenced, are those primarily for Chromebooks or are you seeing any other constraints?

Yeah, no I think Anthony we are seeing more than just Chromebooks. Certainly glass is probably the biggest overall shortage and of course that would affect notebooks displays of sorts and certainly Chromebook buying has increased pretty significantly. So there's -- that's not helping the costs because it's using so much of that. But we're also seeing other areas that are concerning. Our processes have been sort of tipsy turvy here for the last almost 18 months, right. It hasn't been real consistent supply. So that continues to be a little bit of a concern. I think that gets alleviated more in the future times as Apple of course is committed to using their own silicon. You've seen Microsoft announced they're going use their own silicon in their surface devices, and Samsung has announced they're going to use their OWN Silicon. So, I think that does certainly alleviate but that's a longer term sort of recovery than what we're seeing here for the next quarter or two. There's also signs of some memory shortages that are occurring as well and of course that goes more -- more of that of course is used. You are seeing automotive complain about the fact they can't get enough devices themselves. So it goes across the full supply chain and certainly infrastructure products are also impacted by that. It's not a reason for alarm at this stage, but certainly lead times are stretching and there's a lot of focus on improving lead times at this stage, but it definitely is not flowing like it would normally flow.

Got it. Okay. Thanks for that color, Ken. Definitely appreciate that. And then as far as just looking at the guidance for the year, so you're expecting the back half to be better than the first half, and as far as just wondering now that you have PCM fully integrated, you've had it for a while, but if you could just talk a little bit as far as growth that you've seen from existing customers versus your ability to win new customers now that you've had PCM under your belt?

Yeah Anthony, really good question. And I think one of the other reasons, of course, we are optimistic on growth for 2021 is the fact that, last year was a heavy year for integrated PCM, especially during the COVID environment where we were doing much of this remotely. So you can imagine the numbers of people internally operating to white glove clients over to our new systems and platforms and web interface and EDI transactions. So a lot of very internally focused that you'd expect when you do an acquisition of that size. That's certainly all well behind us now as we enter 2021. So, we believe that certainly a lot of those clients that's now their PCM teammates fully understand all of our reporting and all of our systems, all of our tools. So they're operating certainly a much higher degree of efficiency than they certainly operated last year at this time as an example. So that certainly gives us also optimism for growth and acceleration of the business.

Got it, alright. Thank you. And best of luck.

[Operator Instructions]. Your next question is from Marc Wiesenberger of B. Riley Securities.

Thank you, good morning. Wondering if you could talk about wallet share gains across your customer cohorts and where were you able to successfully increase scale or scope with these customer cohorts and if you could quantify some of those things?

Yeah, I mean, certainly when you looked at where we certainly gained, certainly the software business has continued to be strong for us. We saw cloud again, we talked public cloud revenues and GPB and now GPB is 20% of our total GP. So that continues to grow and certainly the data sets we have that we are gaining share in those areas. From a business point of view, what we saw in fourth quarter specifically was that, our public sector business was up on nicely in the 15% range for Q4 year-over-year. And that represents in the quarter about 13% of our total revenues came from public sector, so good growth, but we know there's a lot more opportunity in the public sector space and we're continuing to invest very heavily in that area, we are continuing to grow there. And then what we saw really pretty much from our enterprise clients sets and our commercial client sets, the remaining parts of our business in the quarter they were down 2% from a comparison point of view. And so that's where we sort of saw how the market's sort of played out, which again was a significant improvement from what we saw in Q2 and Q3 in those categories.

Great. Thank you. And, and maybe if you could talk about the priorities within the respective cohorts, kind of in the fourth quarter and how you expect that to kind of evolve through 2021 and would any of those kind of changing priorities impact the typical seasonality that we might see in the business and the impacts on the P&L?

Yeah, I don’t think so. I think when you talk about the priorities, are you talking about it more from a client perspective?

Correct.

Yeah, so what we see in general across the board for clients of course, it's continued focused on how they continually improve their ability to collaborate and work from anywhere. So that continues to certainly be a top priority in a very secure way. So security is the top of every client's list as you well know, right. So none of them are going to take any chances there. And of course, as we become more remote and virtual, we've exposed ourselves more from a security front. The security of course is getting lots of attention and driving certainly a lot of substantial dollars. Of the others I mentioned earlier of course is all clients are becoming more digital. So new priorities in there and how they become more digital, how they become more e-commerce oriented. So that's where digital innovation area is helping our clients pretty significantly. And then of course, that dovetails very nicely because again as I mentioned, you've got to modernize the infrastructure, whether it be private or public cloud. So those two cohorts work closely together improving our -- certainly our client experience. So those are the key drivers. Again, everybody -- everything being digital is driven by AI and so forth as well as the work from home collaboration and security are certainly big key areas that of course all of our clients are focused on, and certainly we're focused on.

Great. And one final one for me, with 5G and private networks starting to gain traction, I'm wondering how involved is Insight with IoT and industrial IoT and I know it's still very early, but kind of any medium term aspirations on how that could evolve as a percent of the total business? Thank you.

Yeah, that's a good question. It's one area, Mark that we are certainly very engaged on. We believe very strongly in the intelligent edge, as we've said, there's three clouds. There's the private cloud, which we know and love, the public cloud, which we know is driven by a few key players, AND the largest cloud that will evolve as the intelligent edge is everything comes down to moving from data centers to centers of data. So as things become more and more IoT enabled through AI, that will drive the intelligent edge in a big way. I do believe that COVID probably has set that back a little bit from our prioritization of a lot of our clients, but we saw that accelerating in 2019, a little bit muted of course in 2020, but we do expect that to start to continue to recover. So, we believe we're very well positioned for that emergence of IoT. And that's where digital innovation team is very, very active in supporting clients at the edge and again, that's where our connected workforce also comes through to really help do that through a managed services. So we are seeing, certainly some good bright spots in that area but we believe that's a future growth area for us as a company.

Great. Thank you very much.

Our final question is from Vincent Colicchio of Barrington Research.

Yeah. Ken, most of my were answered, just the supply constraint issue, did that improve at all sequentially or is it sort of status quo?

Yeah Vincent. We're seeing this as probably pretty much status quo. We sort of at all anticipate and hope that it would improve in Q4 and it got a little bit stretched there. And I think, the demand environment is improving to a degree. Certainly we can see that through our booking rates. So I think that's putting more constraints on that. So I think it's going to be a little bit touch and go on supply constraints certainly through this quarter and into second quarter. Again, not catastrophic type of situations where we're seeing huge sort of ASP increases driving all this as well. But certainly something that we're monitoring, on a daily basis.

And then last one just to be clear, are you complete with the cost savings for PCM?

Yes.

Okay, thank you.

Thank you.

There are no other questions in queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.