Good morning, and thank you for attending the Insight Enterprises, Inc. Third Quarter 2023 Earnings Conference Call. My name is Elisa, and I will be your moderator. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions]. I would now like to pass the call to our host, James Morgado, SVP of Finance and CFO of North America to begin. James, you may proceed.

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, 2023. I am James Morgado, Senior Vice President of Finance and CFO of Insight North America. Joining me is Joyce Mullen, President and Chief Executive Officer; and Glynis Bryan, Chief Financial Officer. If you do not have a copy of the earnings release or the accompanying slide presentation 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 the Investor Relations section. Today’s call, including the question-and-answer period is being webcast live and can also 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, November 2, 2023. This call is the property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Insight Enterprises is strictly prohibited. In today’s conference call, we will be referring to non-GAAP financial measures as we discuss the third quarter 2023 financial results. When discussing non-GAAP measures, we will refer to them as adjusted. You will find a reconciliation of these adjusted measures to our actual GAAP results included in both the press release and the accompanying slide presentation issued earlier today. Please note, that all growth comparisons we'll make on the call today relate to the corresponding period of last year unless otherwise noted. Also, unless highlighted as constant currency, all amounts and growth rates discussed are in U.S. dollar terms. As a reminder, 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 periodic reports and subsequent filings with the SEC. All forward-looking statements are made as of the date of this call and except as required by law, we undertake no obligation to update any forward-looking statement made on this call, whether as a result of new information, future events or otherwise. With that, I will now turn the call over to Joyce and if you are following along on the slide presentation, we will begin on slide four. Joyce?

Thank you very much, James. Good morning, everyone, and thank you for joining us today. Q3 met our expectations and delivered records adjusted earnings per share for the quarter. Cloud gross profit grew 17%, and Insight Core Services gross profit grew 20%, demonstrating the progress we are making to becoming the leading solutions integrator. We are also confirming our adjusted diluted earnings per share for the full year of 2023. Here are a few highlights. We achieved gross margin of 18% in Q3, reflecting both an improvement in our revenue mix as well as continued progress in our pricing and profitability initiatives. Q3 adjusted EBITDA margin expanded 130 basis points to 5.7%. We generated $414 million of operating cash flow in the first three quarters of the year, an increase of over $600 million from last year. And consistent with our strategy to focus on cloud and services, we acquired Amdaris, an award-winning software development and digital services company based in the U.K. I will provide more details on this acquisition later. These highlights demonstrate we are on the right path in our strategy in making progress towards becoming the leading solutions integrator. We remain focused on the fastest growing areas of the market, cloud, data, AI, edge, and cyber. While we have been leveraging AI to support clients' needs for a long time, we are really excited about the acceleration that generative AI is providing to us and more importantly to our clients. We've recently filed Gen AI-related patents focused on customer support and sales use cases. These patents integrate large language models with third-party data to enhance support applications, recognize and leverage human sentiment specifically for support applications, reduce hallucinations and query time, which reduces GPU usage, emulate personality types, and improve search capabilities for customer support applications.…

Thank you, Joyce. Our focus on profitability and growth in high-margin cloud and services business has contributed to the expanded margins we've seen in our results this year. And we believe we're well-positioned to profitably grow our top line as macroeconomic conditions improve. Moving on to Q3 results, net revenue was $2.3 billion, a decrease of 11% in U.S. dollar terms and also in consumption currency. The decline was primarily due to hardware, which was down 17% due to devices partially offset by cloud growth. Last quarter, we expressed our belief that we had approached the bottom of the device market and that the decline in our devices revenue was slow. Sequentially, devices were up slightly in Q3. Despite the 11% decline in net sales, growth profit increased 2%, reflecting the hardware decline offset by higher cloud and Insight Core Services growth, as well as the benefit of profitability and pricing initiatives we implemented last year. Insight Core Services growth profit was $71 million, an increase of 20%. This performance reflects growth in applications, data, digital enablement, as well as networking, partially offset by a decrease in integration and other services related to decline in devices. Cloud growth profit was $96 million, an increase of 17%, reflecting higher growth in SaaS and infrastructure services. Growth margin was 18%, an increase of 220 basis points, and reflects the higher mix of cloud, Insight Core Services, and infrastructure products, all of which transact at higher margins relative to devices. In addition, our profitability and pricing initiatives also contributed to higher hardware and services growth margin. Last quarter, we accelerated cost reduction actions to better align our cost structure to the market environment. These actions were completed by mid-quarter, and we have started to see the benefit of the actions in North America,…

Thanks, Glynis. The long-term dynamics of the IT industry are very strong. Digital transformation is here to stay in technologies like generative AI are accelerants. At Insight, we are staying focused on delivering outcomes, our clients value most, leveraging our skills, and the fastest-growing areas of the market. To summarize our results this quarter, Insight Core Services gross profit grew 20%. Cloud gross profit grew 17%, adjusted even to margin increased to 5.7%. Adjusted diluted earnings per share grew 19%, adjusted ROIC was 16.8%. And trailing 12 months, free cash flow as a percentage of adjusted net income was 211%. Our portfolio of solutions gives us the resiliency to navigate through economic cycles, and we are prepared to capture gross opportunities when spending patterns improve. We have a healthy balance sheet, and our business delivers strong cash flow, giving us the capacity to fund our capital allocation priorities, in particular, acquisitions in the fastest-growing segments of the market. In closing, I want to thank our teammates for their commitment to our clients, partners, and each other, our clients for trusting Insight to help them with their transformational journey, our partners for their continued collaboration and support in delivering innovative solutions to our clients. This concludes my comments, and we will now open the line for your questions.

We will now begin the question and answer session. [Operator Instructions] Our first question comes from the line of Joseph Cardoso with JP Morgan. Your line is now open.

Hey, good morning, everyone, and thanks for the questions. So, just starting off here, if I'm looking at the full year guide, you moderated the gross profit outlook modestly to the low end of your prior guide. I was just hoping if you could walk us through the big ticket items that are resulting in incremental pressures impacting the guide versus, let's say, 90 days ago? And then I have a follow-up.

Sure, sure. So, Joe, thanks for the question. What I would say is that our device, we're not seeing the improvement in the device segment of the market that we had anticipated. And while that doesn't necessarily drive huge gross margin, it does actually drive some gross profit dollars. We continue to see strength in cloud. We continue to see strength in our Services GP. But the hardware side of the business is not recovering as we had anticipated and is specifically around the device side. To offset that, we have some improvements that we're making with regard to SG&A. We took some SG&A actions last quarter, actually, this quarter, so we have a little bit of benefit this quarter. We expect to have more benefit in 2020 - in 2023 - and in the fourth quarter, sorry.

Got it. And then maybe we could just touch on that part of devices. Can you just give us a little bit more color on the linearity of customers spending to the quarter, particularly as it relates to the improvement that you are seeing in devices? And then, maybe just more broadly, not specific to devices, are you seeing any divergence across your various customer verticals like large enterprise SMB and public sector from an overall spending behavior standpoint? Thanks for the questions. Appreciate it.

Hi, Joe. This is Joyce. Thank you very much for asking. So here's the thing. I mean, first of all, I want to make sure it's notable that the reason we set out on this strategy is because we know that devices are going to be inherently cyclical and as we've seen a lot of that this year, and still we've delivered record EPS for the quarter. So, that's kind of a backdrop. But then in terms of devices, we have seen some sequential improvements. We expect to see some continued sequential improvement. But instead of seeing growth as we thought at the beginning of the year in Q4, we expect to see that push out a couple, a quarter to probably to the back half of the year. And we know that that's pretty consistent with what we're hearing from our partners and what we're seeing in the market. From a segment point of view, generally we see some improvement first in the commercial space, and it takes longer for that to take hold in the enterprise space. Given the dynamics of the device market, we do believe that Windows 11, Gen AI requirements, hybrid work requirements will drive refresh cycles. But again, those generally, you see that sooner in the commercial segment and later in the enterprise segment. Public sector has been strong for us overall, and that's consistent with kind of the amount of money that's in the public sector at the moment.

And just on the linearity piece, we didn't see any differences really throughout the quarter in terms of how July versus September transacting sort of the third month of the quarter is always strong.

Thank you. The next question comes from the line of Matt Sheerin with Stifel. Your line is now open.

Yes, thank you and good morning everyone. Just related to the hardware sales, I know client devices are part of it, but so are infrastructure, products, storage servers, networking. And I know you've commented that you've had good backlog, particularly on the networking side, but that's the expectation where that backlog were to get worked down with improving supply. So could you give us some color on what you're seeing with those products and how that plays out in Q4 and into next year?

So yes, so the infrastructure backlog has largely normalized now. And we are seeing some softening and infrastructure demand that's really, again, consistent with what we're hearing from our partners. There's a bit of uncertainty just, acquisition, quotes are taking longer to turn into POs, et cetera, et cetera. However, we still believe the long-term dynamics are very strong. Again, we think Gen AI will be an accelerant around infrastructure, and so we're spending a lot of time. It's just sales cycles are a little longer.

Okay. And you talked about sequential growth in client devices in Q4. Would you expect the infrastructure products to be also up seasonally?

Well, we have a little bit of a different dynamic because we just lost a bunch of backlog in Q3, so we would not see the same dynamic there. That's largely driven by backlog.

Okay. Got it. That's helpful. And as you noted, the free cash flow has been very strong. I know the inventory's been coming down. I imagine because of the client device flush and also a better supply. Could you talk about expectation for working capital and inventory going forward?

We would say that our inventory has largely normalized as of right now versus the buildup that we had back in the supply constraint era, and we would expect that it would stay around this level as we move forward. Our working capital has been great at this stage, given that hardware is very soft. It's improving, but it's still very soft. We would anticipate that we'd still be in a positive working capital environment if hardware were to grow and be kind of low to mid-single digits. It becomes more problematic for us when hardware is growing in the 25% to 30% - devices in particular, in the 25% to 30% range like it did in 2021 and 2022. So we'd anticipate that we'd see a new working capital that we have right now.

Okay, great. And just lastly, your comments about the pricing and profitability of projects that you had in terms of customers and increasing pricing. Could you talk about that? Is that across hardware, across services? How successful has that been?

I think it's been very successful, as evidenced by the gross margin appreciation that we've seen and the improvement in gross profit on declining revenues. So we have a strategy that is related to hardware. I want to think about it that way. In terms of the floors, that the pricing that we will accept from large customers and approval processes that we put in place with regard to level of gross margin relative to size of customer, et cetera. And we've also put some floors and ceilings in place around services that has helped drive that improvement in gross margin, as well as really looking and standardizing our utilization metrics across all of our service practices so that we are measuring it consistently and that we can really pinpoint where we need to be focused in terms of utilization. And to be fair, we've also leveraged some offshore capability to lower our overall charge out raise that has helped with the gross margin as well as services. Since then, a combination of various factors, I would say they're now systemic. They're not one-off anymore.

And there have been no share issues or share loss issues because of that in terms of competitive landscape?

I would say if you look at our results, we're looking for our largest reseller competitor out there, as I've talked about it from a hardware, from a client segment perspective, we've definitely held our own. We've definitely held our own.

Okay, great. Thank you.

Thank you. The next question comes from the line of Anthony Lebiedzinski with Sidoti. Your line is now open.

Hi, good morning.

Morning.

This is [indiscernible] on for Anthony Lebiedzinski. My first question is, can you talk about the performance during the quarter for your different client groups, such as large enterprise, public sector, and SMB?

Yes. So, I think we've published all this. It's all in the documents, but I'm happy to talk about it. I think the most challenged segments for the quarter is the enterprise business overall. Conversion was also pretty challenged, I would say. Public sector was strong. So I think we're happy with that because we think that's pretty consistent with the market.

Yes. So, our public sector grew a low single digit. A little bit low to mid-single digit. And the enterprise and corporate and commercial segments were down in the double digit in mid-teens area.

Yes, commercial was down the most.

Thank you. And do you think we are at the bottom for the demand for devices? Or if not, when do you expect to show positive results for devices?

So, we said last quarter we thought we're at the bottom of the device market. We believe that that was true. We saw some sequential growth that we expect to continue, largely because the comparisons also get a lot easier.

Thank you so much.

Thank you. The next question comes from the line of Jake Morrison with Raymond James. Your line is now open.

Hey, thank you for taking my question. I'm hoping you guys could touch on the performance geographically a little more. Maybe touch on what you thought of EMEA relative to expectations and maybe just the overall macro environment there relative to Americas? Thank you.

Okay. So, EMEA business delivers to our expectations. I would say that maybe the mix of business was a little bit different. I think that the outlook for the EMEA region for Q4 as well as going into 2024 is likely is softer than it is anticipated to be for North America. We did do an Amdaris, the Amdaris acquisition in EMEA. So, as we look into 2024 we would see some growth coming through from that. I know, so, by the time you identify the expenses, it's not necessarily material to total Insight results, but you will see kind of improvement in services growth margin associated with that acquisition. And we think that that acquisition will also help with regard to data and cloud related sales that drive combined with services business outcomes for our clients. So we think that the acquisition should be very beneficial to EMEA as we go into 2024, especially in light of a softer economic environment that's forecast in EMEA for next year.

Perfect. And then on the topic of M&A, can you just please opine on your sort of M&A outlook or what you're thinking about fiscal 2024 just after coming off the Amdaris acquisition? Thank you.

So, we've been pretty consistent in talking about focusing on acquisitions that help us improve our capabilities in the fastest growing areas of the market, cloud, data, AI, edge, cyber. So, nothing has changed there. We're really pleased by the acquisition in EMEA and we remain very, very focused on looking for other acquisitions that can offer great capabilities to our clients. So, we're still very, very focused on it. We also have the capacity, of course, on the balance sheet, I think, like Glynis talked about. So, no change in the strategy there. We do believe that the transactions and the valuations have come down this year, so it's making it a bit more possible to do things like Amdaris.

Thank you. The next question comes from the line of Vincent Colicchio with Barrington Research. Your line is now open.

Yes, Joyce, it was mentioned that offshore was leveraged to boost margins. Will that become an increasing focus for the company going forward?

Yes. For specific services, Glynis mentioned the work that we're doing to improve the structural profitability of our services business. We're pretty pleased with the work we've done so far there. And as you might remember, we bought Hanu about a year ago, a year and a half ago, and we have been working to figure out how to leverage those global capabilities in all three regions. So, for specific offers and specific capabilities, we expect to continue to leverage India. And we have been doing that for quite some time, by the way, for our own internal back office primarily in Manila, and now we're doing that both in Manila and in India.

And I came out of the call a little late, you may have mentioned, but the use of AI to improve productivity and programming, how far off is that in the future? Is there a line of sight to that?

The future is now, Vince. It's happening now. We've been really, really excited about the work that we've done. We launched Insight GPT about, I want to say, about six weeks after Microsoft did the open AI announcement in February. We've been using internal use cases to help educate our clients on what the opportunities and possibilities are in their environments. And that's driven a lot of interest and a lot of client meetings and a lot of assessments. And that's also driven some very significant opportunities to improve quality of data and data space for our clients, so they can leverage these analytics capabilities and also certainly some use case development and application development. This is absolutely an accelerant, we think, over the long-term or medium term, and we're seeing it start now.

Yes, I'm curious about its ability to improve programming productivity. Any thoughts on that?

Yes, well, we have - so the leader of Amdaris gave a number that is very exciting in terms of software developer productivity improvements. But, I mean, we're hearing this over and over again from our partners as well, but somewhere in the 100 to 100 plus X improvements in terms of productivity is something that we're aiming for. I wouldn't say we're there yet, but we have seen already significant improvements in productivity in the 20%, 30%, 40% range, primarily around quality checks, quality auditing, and just development time.

Thank you.

Thank you. There are no additional questions registered at this time. [Operator Instructions] There are no further questions at this time. We will now conclude the call if the team has any further remarks. That concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.