Glynis Bryan - CFO Ken Lamneck - President and CEO

Adam Tindle - Raymond James Aman Gulani - B. Riley & Company Matt Sheerin - Stifel

Good day, ladies and gentlemen and welcome to the Insight Enterprises First Quarter 2017 Operating Results. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Ms. Glynis Bryan, Chief Financial Officer. Please go ahead.

Thank you, Jonathan. 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 March 31, 2017. 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 which was posted most recently and filed with the Securities and Exchange Commission on Form 8-K, you will find it on our Web site at insight.com, under our Investor Relations section. Today's call, including this question-and-answer period, is being webcast live and can be accessed via the Investor Relations page of the Web site 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 Web site for a limited time. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, May 03, 2017. This call is a 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 refer to non-GAAP financial measures as we discuss the first quarter 2017 financial results. When referring to non-GAAP measures, we will refer to such measures as adjusted. Adjusted measures discussed today will exclude severance and restructuring expenses recorded in all periods, and the acquisition related expenses recorded in the first quarter of 2017 as well as the tax effects on these items. You will find a reconciliation of these adjusted measures to our actual GAAP results included in the press release issued earlier today. Also please note that, unless highlighted as constant currency, all amounts and growth rates are discussed in U.S. dollar terms. For business, exclude Datalink'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 Annual Report on Form 10-K for the year ended December 31, 2016 and other reports we filed with the SEC. With that, I will now turn the call over to Ken. Ken?

Hello everyone, thank you for joining us today to discuss our first quarter 2017 operating results. I am pleased to report that we have an outstanding start to the year with record financial results in the first quarter. Our team delivered double-digit organic sales growth and gross profit growth across our largely fixed expense base, which drove adjusted earnings from operations up more than 100% year-over-year. For the first quarter of 2017, consolidated net sales were $1.48 billion up 26% year-over-year including both organic growth of 50% and the addition of Datalink to our business beginning January 6. Net sales in constant currency were up 29%. Gross profit was $208 million for the first quarter, up 29% year-over-year and up 32% in constant currency. Gross margins were 14.1%, up approximately 30 basis points year-over-year reflecting the positive contribution of Datalink partially offset by lower gross margin in our core business driven by a lower mix of fees from software enterprise agreements and lower product margin with large accounts. Consolidated selling and administrative expenses were $178 million in the first quarter, up 22% year-over-year including both slight organic growth of 1% and the addition of Datalink. Strong organic growth in sales and gross profit combined with effective cost control led to earnings from operations from our core business of almost doubled of what we reported last year. In addition, we had a Datalink to our business early in the first quarter which delivered top-line results in line with our expectations and with a small positive contributor to adjusted earnings from operations for the quarter including intangible asset amortization expense. All this led to adjusted earnings from operations up $30.6 million, an increase of 104% compared to last year's first quarter. On a GAAP basis, earnings from operations increased 68% to $23 million. And adjusted diluted earnings per share were $0.56, a first quarter record for us on a GAAP basis, diluted earnings per share was $0.38. Our North America business executed exceptionally well in the first quarter reporting top-line growth of 34% including organic growth of 19% as well as addition of the Datalink business. Two new client wins and new projects for the existing clients in the first quarter, we gained market share in the data center and software categories while holding our own with devices. By client group, our strong top-line growth was primarily driven by increased volume with large enterprise and public sector clients while sales to SMB clients grew low single digits. Gross profit in North America outgrew sales at 42% year-over-year with gross margins increasing 70 basis points to 14.2%. The power of strong gross profit growth combined with significant operating leverage and the modest earnings contributions from Datalink drove adjusted earnings from operations up 133% year-over-year to $27.3 million. Our review of hardware market shares suggest that Q1 growth across the channel was fueled by demand for devices. We also grew double digits in devices, but in the data center we outperformed the market in Q1 in our core business. Large projects with new and existing clients showed shared gains in the server and storage categories. While we know that large projects can create volatility in our results, we have been gaining share on the datacenter category consistently over the last year and believe there was additional share available in future as we begin to realize the power of the Datalink and Insight combination. As previously announced, we closed the Datalink acquisition in early January. We immediately began executing integration plans around sales engagement, IT systems and back office functions. We have driven the integration across key work streams and functional teams to ensure readiness by our teammates, partners, clients and systems. I'm pleased to report that on May 1, we completed the migration of the Datalink business onto our SAP platform. With just few days in and the migration went very well, we're effectively working away through the usual short-term challenges and change management issues. We remained very excited about the long-term potential of Insight Datalink together. We believe that our new teammates are engaged and excited to be part of Insight, just as we're happy to have them on Board. We're on track to meet or exceed our expected cost synergies and are seeing early success in the pipeline of cross-sell opportunities throughout the business. Moving on to the first quarter results in EMEA, net sales increased 20% year-over-year in constant currency in the first quarter of 2017, reflecting double-digit growth in hardware, software and services for the quarter. Gross profit grew 8% year-over-year in constant currency, however, gross margin contracted 140 basis points year-to-year due to higher sales to large enterprise clients. Adjusted earnings from operations grew mid single digits in constant currency, while on U.S. dollars adjusted earnings from operations were down 13% year-over-year. Our May results in Q1 generally met our expectations in constant currency, but we believe there is an opportunity in certain markets to realign our cost structure to match current business volume. As a result, we took certain cost reduction actions and recorded $0.07 restructuring expenses in EMEA of $3.5 million in the first quarter. We do not expect to incur the magnitude of this expense over the balance of 2017. In Asia Pacific, first quarter net sales decreased 9% year-over-year on constant currency. During the quarter, we continued to see clients convert from on premise to cloud solutions in the software category. [Indiscernible] net results in our reported software sales being down year-over-year. This decline was partially offset by double-digit growth in hardware sales and the contribution of Ignia, an acquisition completed in the third quarter of last year. Gross profit grew by more than 20% reflecting the underlying growth in cloud solutions and higher services sales, which drove earnings from operations up significantly compared to last year. Across markets where we operate will continue to see clients migrate key workloads to the cloud. As a global software provider with strong integration services and application development capabilities, we're well-positioned to help our clients' transition to the cloud. Our operating scale for the needs of our clients that can be customized in our hybrid solution from large enterprises and hosts are standardized and delivered to our public cloud portal for clients in the midmarket. Today, cloud sales drive approximately 12% of our consolidated gross profit. With increased demand for as a service solutions around devices and infrastructure, we believe our multi-brand portfolio of offerings, strong datacenter capabilities and long history of supply chain expertise will help us serve our clients well and grow our share in this category. Finally, the first quarter showed us that the IT industry is stable and continues to represent opportunities for us to achieve growth and shared gains. For growing cloud, datacenter and supply chain capabilities combined with our best-in-class digital marketing platform are driving increased interest with our clients and partners. We also remained disciplined from an expense standpoint with a clear focus in operational excellence and believe we're well-positioned to continue to compete and win in the marketplace in 2017. I'll now hand the call over to Glynis, who will discuss additional highlights of our first quarter financial results. Glynis?

Thank you, Ken. Ken covered key highlights of our excellent first quarter results very well, so this is my time to highlight other important factors. Today, Datalink business performed in line with our expectations in the first quarter. We continue to expect this business to contribute approximately $600 million to top-line results in 2017. And as a remainder; Datalink gross margins are circling around 21% to 22% in net sales. Also, we expect SG&A as a percent of sales will be just under 20% for the full year including expected intangible amortization expense of about $12 million and the impact of expected synergies, but excluding this acquisition and integration related expenses. And as I have mentioned on our last conference call, we borrowed approximately $200 million to fund the acquisition. Our current average borrowing rate -- average effective borrowing rate is approximately 2%. This borrowing was a significant driver of our increased interest expense year-over-year in the first quarter. In the first quarter, we incurred $2.9 million in acquisition-related legal and professional expenses associated with our acquisition of Datalink. We also recorded severance and restructuring expense in North America of $1.1 million, the largest majority of which was related to plan integration activity. The bulk of this spend is now behind us. Our expected tax rate in the first quarter was 26.2% compared to 38.2% in the first quarter of last year. This decrease was due primarily to the reconciliation of $2 million of tax benefits and the settlement of employee share-based award during the first quarter of 2017 in accordance with the new accounting standard which was adopted effective January 1, 2017. For the balance of 2017, we expect our effective tax rate will be approximately 38%. Moving on to cash flow performance, our operations used $152 million of cash in the first quarter. As discussed in our last call, our Q1 cash flow results were adversely impacted by the effect of the timing difference between the collection of a single large receivable in Q4 2016 were approximately $160 million for which the payments to the supplier will due and paid January in 2017. Also in the first quarter, we invested $10 million in capital expenditures up significantly year-over-year due to investments in IT infrastructure upgrade, our global Web site and our digital marketing platform. We expect capital expenditures to be between $20 million to $25 million for the full year of 2017. Also in the first quarter, we acquired Datalink of approximately $181 million reflecting the growth purchase price up $257 million and the offsetting effects of cash and cash equivalents acquired. We did not buyback any stock in the first quarter of 2017, but for comparison purposes, we used $13 million to acquire shares in the first quarter of last year. All this reflect were cash balance of $184 million at the end of the quarter, of which $154 million was [indiscernible] in our form subsidiaries and we had $376 million of debt outstanding under our revolving and term debt facilities. This compares to a $174 million of cash and a $140 million of debt outstanding at the end of first quarter 2016. We do not include the balance sheet and cash flow statement for their earnings release this afternoon. We filed our 10-K this week with full financial statement. We're finalizing the changes required to present the Datalink information in our balance sheet and cash flow statement. This will not have any impact on the P&L or the consolidated cash flow performance I just discussed. I'll now turn the call back to Ken for our outlook for 2017.

Thank you, Glynis. With respect to our 2017 outlook, for the full year of 2017, we now expect our business to deliver sales growth of 15% to 18% compared to 2016. We're also increasing our adjusted diluted earnings per share outlook for the full year of 2017 to $3.03 to $3.13. This outlook assumes an effective tax rate of approximately 38% for the balance of 2017. This outlook excludes severance and restructuring and acquisition-related expenses incurred during the first quarter of 2017 and those that maybe incurred during the balance of 2017. Thank you, again, for joining us today. I want to thank our teammates, clients and partners for their dedication to Insight and for the hard work that resulted in our record first quarter. We're very excited about the quarter and look forward to a strong year. That concludes my comments. I'll now open the line up for your questions.

[Operator Instructions] Our first question comes from the line of Adam Tindle from Raymond James. Your question please.

Okay. Thanks and good afternoon. Just wanted to start on the 2017 outlook, the build-up of the 15% to 18% sales growth year-over-year, I just wanted to clarify, I think you previously said Datalink was $600 million or 11% and you're reiterating that today.

Reiterating $600 million, yes.

Okay. So, the new assumption is basically kind of 4% to 7% organic as reported and currency probably is about 1% headwind to that.

Yes. I'd say that our base in U.S. dollars is in the mid single-digit range, and then, you layer on Datalink on top of that. Currency headwind in the first half of the year is a little bit stronger than it's going to be in the second half of the year. So, if you look at the euro and the sterling in the first half of last year, the sterling was around 140-ish and now it's around 122 to 125 and euro was about 113 and it fluctuate in the first quarter of this year between 104 to 109. So, there is a little bit of that in the first quarter and the first half actually compares and the second half it will be a little bit more consistently year-over-year.

Okay. Are you anticipating any slowdown from the ERP implementation inherent in that guide? And then, Ken, can you expand on the near-term ERP challenges that you mentioned, how long do you expect those to linger?

That's interesting, maybe I wasn't clear, Adam, but actually the ERP is actually transferred very nicely for us on May 1. So, exactly according to our plan of what we've stated and everything has gone as I stated very smoothly in regard to that. So, no, we don't see any concerns there at all and actually if anything ahead of schedule for us and things are flowing smoothly, we'll see the normal sort of change management issues as people learned systems, just very small things, but the training programs are well underway. And now, we don't expect that -- anything have a positive impact on the performance for Datalink in the business. So, I'm glad you asked that if I wasn't clear on that.

Okay. And I may have missed heard. I apologize. Last one from me, for 2017, I think your implying EFO margin around 3%. Can you confirm that and what drove the confidence to raise this range given it sounds like -- I think you mentioned some tough trends in the core business?

Yes. I think we get the EPS guidance is what we increased as you saw and basically if we looked at our first quarter results and you flow that through you'd see that certainly well-performing consensus wise. So if you flow that through you saw that we increased the guidance on the EPS range from somewhere previously to $3.03 to $3.13.

Adam, were you asking questions specifically about the EFO or…?

Yes. I was trying to dig into the inherent margin assumption in that. I guess are you anticipating -- so I was thinking that you'd probably get to about 3% EFO margin on that. And I was wondering if you had any partner program changes that had impacted you in the past baked into that number?

In the guidance that we've given any of the partner program changes that we know about are included in the numbers that we have provided. The 3-ish percent range is plus or minus 10% basis points, correct.

Okay. That's helpful.

In the range.

Okay.

Thank you. Our next question comes from the line of Aman Gulani from B. Riley & Company. Your question please.

Hey, guys. Congratulations on a great quarter. Just wanted to get…

Thank you, Aman.

I just wanted to get more color on the Datalink acquisition synergy, I know you said you fully integrated two days ago, do you expect to realize more maybe $10 million in synergies for the remainder of the year.

We have $10 million to $12 million, Aman, that's what we expect that will actually see this year. And then, it will be a total of $20 million by the end of next year and so we're well on track to achieve that.

Okay. All right. That's all the question I had.

Thank you. Our next question comes from the line of Matt Sheerin from Stifel. Your question please.

Yes. Thanks. So just on the guidance and you're guiding the Datalink business in line with your previous guidance in terms of top-line given that you've done the SAP integration it seems like perhaps sooner than expected, will you be generating some SG&A or OpEx savings ahead of schedule and is that partly the reason for the better guide for the margins for the year?

I'd say it's really -- Matt it's – it's a $10 million to $12 million, which we have sort of modeled. So maybe a little towards the higher end of that number as we're expecting for this year. So getting a little bit earlier than we'd expected, but was pretty much in accordance with our plan was maybe a little bit earlier. So that's not a huge impact, but certainly well on line to be able to execute and deliver those cost synergies of $10 million to $12 million, so very much in line with that. So, no, I don't think that had an impact that say the core business as you saw the organic growth was pretty significant in the core business so that had the biggest impact of course of increasing our guidance for the year was based upon the core business both in North America as well as in Europe and Asia-Pac.

And Matt just another little point of clarification maybe is that, the launch of the -- existing go-life for Datalink, the migration is consistent with the timeline we had internally, this is not early for us. We had a May 1st timeline internally and we hit that timeline. So, it is consistent with what we anticipate in delivering around that systems integration and the guidance that we gave.

Okay, great. And looking at, I mean I know there is seasonality of your business changes somewhat because Datalink is somewhat less seasonal in terms of the swings quarter-to-quarter particularly given your exposure on the software side. But looking at last year, you had a couple of-- I know one-off sort of benefits from customers -- big customer projects and orders, I know in at least in the June quarter that sort of threw things you actually gave you benefits that weren't repeated. Do you have any visibility into some of those programs where you may see any of that whether it would be next quarter or sometime this year?

We have visibility -- we have pretty good visibility into the second quarter with regard to our expectations about results in the second quarter. So we feel pretty confident with the -- our internal forecast as it relates to the second quarter and proceeds that we're going to be -- we'll show some year-over-year growth in the second quarter associated with the results that we posted last year. We have less visibility as we go throughout the year and so when you look at the guidance that we gave the valuation of $3.03 to $3.13, it is primarily based on flowing through the benefit that we saw -- that we got in Q1 that was over and above our expectation. And then, Q1 -- Q2 being visibility that we currently have with regard to what we anticipate happening with large projects. We sometimes look out and have large projects repeat or have new customers that come in that also deliver significant projects in subsequent years as well as our view for what's going to happen towards the rest of the year. It's just relatively strong IT market is what we would say and our large customers are buying IT and that's what we're seeing in our results.

Okay. And so are you then expecting your operating profit then to increase year-over-year against very tough comps last year in the June quarter.

It's a very specific question;, we're not going to answer it.

Okay. Fair enough. So, maybe Ken, you can address the -- some of the operating issues in Europe, I know you're seeing good growth in constant currency, but certainly lower gross margin because of the mix of business and you've talked about taking cost out there. And I know it takes a while before you realize those costs in Europe. But maybe to walk us through and how that plays out in terms of your margins and any margin targets that you have for the European business.

So it's -- I'll address and then Glynis could chime in. So, yes, I mean the sales growth obviously is pretty 20% constant currency growth, so really solid there. A few big deals are brought down the gross margin related to some large software enterprise agreements and some hardware deals, lower than margin there for -- but certainly good growth on a top-line and obviously growth year-over-year on the earnings line as well. But we looked and we said, hey, there is a couple of markets where there is some inefficiency. So we've taken that very specific action, so I think you should see that model is a $3.5 million will probably occur and Glynis correct me, if I'm wrong over the next -- certainly with -- some of it's already been done this quarter, but you will just start to see that pretty work is way through the end of the quarter.

Great. But, I just want to remind you that when we take charges in Europe in general, the benefit that we get from the charge is not typically recovered in the first year. So we took a $3.5 million charge, the benefit that we're anticipating getting at on an annual basis is $2 million. So most of that benefit we're not going to end up seeing in 2017, we would see that more in 2018, just throughout that expectation. We see a little bit of it in the second half, but primarily we'll see the benefit of that in 2018.

Okay.

And probably a two-year payback on that.

Okay. And then, Ken just on the strength you're seeing on the hardware side and CDW you talked about seeing an acceleration in terms of corporate PC [re-crash] [ph], what do you think is driving that right now?

Yes. I mean I think it's -- there has been a lot of good innovation actually in the product categories when you look at the partners, which I think have been lacking for a bit. So I think you're seeing some really good products and some very, very attractive price points. And so I think that certainly accelerating lot of the need as people go through the migration that's become very attractive for people to continue to upgrade devices. But that continues to grow and has been pretty consistent grower in double digits and as we track the NPD data very careful every week. We held their own but it was definitely a double-digit growth in the marketplace and we held share there. But, I think everybody is seeing the benefit of that continued growth and it's been pretty consistent, I'd say for last couple of years, it's very interesting, but we're seeing people go to the sort of a few year sort of lifecycle -- refresh cycle. And it occurs on a continuous basis now. There isn't sort of one sea change like there use to be of a new processor or a new operating system, or companies now basically do this on a very sort of repetitive basis now do core of the organization every year kind of a thing. So, I think that's what leading to the continued growth there.

Got it. Okay. All right. Thanks very much.

Thank you. [Operator Instructions] And this does conclude the question-and-answer session as well as today's program. Thank you for your participation. You may now disconnect. Good day.