Insight Enterprises, Inc. (NSIT) Earnings Call Transcript & Summary

And we are live. Good morning, everyone. My name is Paul Coster. I cover alternative energy and IT hardware for JPMorgan Equity Research. And this is the 48th JPMorgan TMT Conference, the first one that's virtual as far as I'm aware. And so far, so good. I am still winning the worst self-administered haircut competition. I'm very happy to introduce Ken Lamneck, the President and CEO of Insight Enterprises this morning. Good morning, Ken, can you hear me?

Good morning, Paul. And yes, thanks very much, and it's good to be here.

All right. Thanks for joining us. And we also have joining us though disembodied is Glynis Bryan, the CFO. So she may chip in at a certain point. Now the audience should know that they can submit questions. To do so, you tap on the Q&A button and just enter your thoughts. I'll do my best to collate them as we proceed. So please do use that feature.

Ken. So what is Insight, first of all, for those who may not be familiar? And how are you different from your peers?

Yes. So Insight is a global IT solution provider, and we provide technology products, hardware, software and services to commercial clients and to public sector clients around the globe. We go to market focused on 4 key solution areas that our clients need. The first one being a really optimized supply chain. So we've got a lot of e-commerce capabilities that really allow them to procure products very, very efficiently. The second would be what we call Connected Workforce, and that's really all about business continuity. And of course, with the COVID crisis that's become a real premium for all clients to look at how they really make sure they provide the right technology to their employees, so they can continue to collaborate and continue to get business done. The third solution area is called Cloud + Data Center Transformation, and that's everything about cloud. We believe very strongly it's a hybrid cloud world and the fact that we need to help clients navigate between both private cloud and public cloud, and we can help analyze and assess which workloads are better fits for private cloud, which make more sense to go public cloud and we can actually do the technology associated with moving those workloads to the public cloud, if that makes the most sense for those clients. And then the fourth area is Digital Innovation. And of course, that's everything digital. As we know, that's continuing to be the trend. I think coming out of COVID, that's even going to continue to be more the trend where everybody realizes they have to become more digital, very much like what we're doing today. So those are the areas that we really focus on to really drive value to our clients.

And so in terms of how you differentiate from your competition, who is your competition? How big is this market?

Yes. I mean, the market, of course, is a substantial market that's measured from an IT perspective in hundreds of billions of dollars that we address globally in the marketplace. So it's a huge market. And what's interesting about the market, it's very fragmented. So as an example, when we look at the North American marketplace, specifically, we have very good data on. And that pretty much extrapolates globally as well. You'll find that the top 10 sort of partners, of which we're one of those top 10. So CDW would be another one in that fold. And there's a couple of large private ones as well. We basically have been growing at a compound annual growth rate over the last 5 years at 9%, and the 80% of the small partners, who control that market, are growing about 5%. So it's a very fragmented market, which presents a significant opportunity for some of the large-scale players to really address.

Is scale the big differentiator?

Yes. Scale certainly becomes a differentiator certainly in the IT platform, the e-commerce tools, the digital marketing platforms that we create, invest, and makes it more challenging certainly for smaller companies to continue to make those kind of investments.

All Right. But it's also competencies. I kind of get a sense that scale equals competence as well at a certain point, right?

That's correct, yes, because we can obviously invest more, and we've got certainly multitude of resources. When you look at managed services offerings, really hard for a small company to really put those resources together in a very meaningful way for clients. And to provide scale, we can provide it very cost efficiently for clients. So that gives us capabilities to deploy large teams globally to really do the kind of managed services that our clients really need going forward.

Yes, you ran short of comparable companies in the public space quite quickly because they're all gone. And one of the reasons is you as well have been a consolidator, I mean, most recently with PCM. Perhaps you can address the whole question of consolidation as well. But interested to hear how is the -- why did you make the PCM acquisition? How is it going? Are you realizing the intended benefits?

Yes. So very much. So PCM was very strategic for us. It was a large-scale company. It was a public company, $2.2 billion in sales. It had a North America footprint with 1 element in the U.K. as well. And what was important to us was to really -- Insight has been very focused traditionally on the large and enterprise client set, and we needed to build out the mid-market client set, and PCM certainly had that of the $2.2 billion, $1.6 billion of that revenue is in that mid-market space, which really lends us the ability to really provide the kind of managed services offerings we have into that space going forward. So that was very, very strategic for us. They are also working a considerable amount of cost synergies. We announced publicly, of course, that we would see $70 million in cost synergies over a 2-year period. So basically $35 million this year, and I'm happy to report that we're certainly ahead of that schedule, looking to be $40 million to $45 million here in 2020 that we'll be able to deliver. So the integration has gone well. We actually had a multitude of ERP systems, which some people get scared of, but we're pretty good at that, knock on wood, to be able to integrate those into our SAP platform. So we've integrated at this stage, over 90% of all the clients are now integrated into our SAP platform, and that amounts to a little over 60% of the revenue. And the reason that is, is because those larger clients, even though they aren't that numerous, there are significant clients only to be sort of white-gloved because they have e-commerce connections and EDI connections that we have to do in a very sort of customized manner. And the COVID crisis has put a little bit of a pause on that, but we do expect that we'll actually finish that completely through the end of the summer.

How are you able to get ahead of the curve in terms of realizing the cost synergies?

I think we had a pretty aggressive approach initially out of the chute that enabled us before COVID hit certainly to make sure we're well-positioned and really get ahead of the systems integration aspects of the business because that's where so much of the cost is tied into. So we're able to get ahead of that to bring that in, and again, on track, and we'll continue to certainly be able to deliver that by the end of 2020.

Another attractive feature of the PCM acquisition is they have higher gross margins than you, right? Why was that?

That's correct. Yes. Because they service that mid-market base of customers, which tends to have a higher-margin profile. And they also had a considerable amount of services business, which again is more margin-enhancing. So those elements, because we play at the large and enterprise, you can imagine how competitively sought after that kind of business is from those clients who have so much scale. So we tend to have lower margins in our larger to enterprise clients, but the mid-market tends to be a richer margin portfolio. And we are pleased to see in our first quarter results, as you probably saw, we actually improved margins by 50 basis points, which got us to an all-time high, so that was considerable.

So you've seen a good deal of consolidation take place. I mean, obviously, private equity-like what they saw, they saw what may be viewed as attractively valued assets out there. And you and CDW are kind of the last ones standing domestically, almost feels like. Well, what's happening big picture?

Yes. I think certainly situations or crisis like this will certainly spur on more consolidation. I think it's a little bit challenging for the smaller VARs for us to do sort of a roll-up strategy. The benefits we get on these larger acquisitions is the synergy profile that we're able to obtain. And in the smaller VARs, where we'll do tuck-in acquisitions, like you saw us do vNext in France here recently. And that's really about skills, getting digital skills, getting cloud skills that we need, but not so much a roll-up strategy. We found it as we've done our assessment analysis. It's harder for us to roll up the smaller VARs just because there isn't the cost synergy models associated with. There is a lot of cost in that business, and it's primarily sort of a sales org that you're acquiring. So to scale that and to acquire that would be pretty challenging. So that's where we really sucked in more larger scale type companies. So it will be interesting to see how it plays out going forward as I do think there's some trends that are playing towards the larger scale players, as you mentioned earlier. Things, again, like digital innovation, building managed services offerings, having skills around digital marketing platforms, which, as we know, become more important to access your clients in the future. Those became a little bit more challenging if you don't have the scale or magnitude of a business to build out those kind of infrastructures. But I would never underestimate them, they're small, they're wiry type companies that always find a way to pivot, to move, and they're certainly always very good competitors.

Just so that it makes sense to people. When you say that it'd be difficult for a small company to, for instance, put in place a managed service offering, what is the investment that you're making to support that kind of service?

Yes. There's certainly technology tools and platforms that you have to have to do it properly, especially when you're building it out globally, so there's consistency across the platforms. So lots of different tool sets that you have out there that are expensive and platforms to build like ServiceNow and so forth to integrate these all into that our clients expect that kind of experience in ticketing systems that you need. And plus, you've got to have the skill sets. You've got to have the skill sets at different levels. Typically, you're at a sort of base level, then you go to a second level on a higher level of talent. And so having the ability to do that, and of course, be able to do it more efficiently than the client can do it, you need to have scale. So you're doing it across a much broader set of customers to be able to spread that cost. So if you're a smaller VAR and you're dealing with -- you're getting most of your revenue from 10 clients, which is very typical, that's hard to be able to build something of that nature out for them. So it's just a matter of the scalability and economics of building that kind of skill set out.

All right. Well, so you reported your first quarter, and it wasn't so bad. But there were clouds gathering on the horizon. Perhaps you can just talk us through the puts and takes of what you saw in the quarter. Then we sort of roll-in to the whole COVID discussion.

Yes. So of course, the first quarter had a couple of weeks of really COVID impact to it. We are global, so we did see the course in China, which is a relatively smaller part of our business that happened much earlier in the quarter. But for the main parts of the business that we have in Europe, and certainly in the U.S., it was really a few weeks into the latter part of the quarter where we saw that sort of hit. And actually, it turned out at that point to be more a positive because clients were yearning to get more business continuity and realizing they weren't. They didn't have all the associated laptops that they needed in order to deploy people remotely. The remote access points, the bigger displays, cameras, headsets, all the basic things to make being virtual possible was really missed. So they -- there certainly was a run at the store for those type of products during the last few weeks of March. So I think the industry overall certainly saw an uptick, actually, if anything, from COVID. But now we're sort of entering sort of the new normalcy of the fact that, hey, unemployment rates are pretty high, as we've all seen unprecedented numbers and the fact that most companies are still sorting through what is the sort of new normal look for them. So Q2 certainly has some clouds in the horizon. We do believe that, of course, IT is well-positioned as an industry to really help advantage companies as they come out of this. But at the same time, most companies are still trying to get an assessment of where are they. And we see certainly big projects certainly being paused at this stage. I don't think they really get canceled. I think they get paused because in IT you definitely need to -- if you're going to modernize and become more digital, you need to modernize not only your front-end, but your back-end. Infrastructure has to get modernized as well. So you can't put it off too long, but certainly, you can delay it. And I think those are the kind of things that we're seeing now here going into the second quarter and third quarter.

Can we get a little more specific around verticals and segments? What is your mix, for instance, of enterprise versus SMB? And which is the better to be kind of over- or under-indexed to? And then how have you managed to escape the worst, which is, of course, travel and hospitality?

Yes. Yes, very good question. So when you look at our business, certainly, the high-end, large-scale enterprise customers, we believe, certainly will weather the storms for the most part. There are specific industries, which I'll touch on, of course, that are a little more hurt than others. But in general, large and enterprise customers will survive this, I think, reasonably well as we come out of this. And then you've got sort of that whole sort of SMB, small medium business. The small, of course, customers are probably going to be the most impacted as we all see business is completely shut down. So how does the small business really come out of this. That becomes difficult when they don't have any revenue streams for months on end. That becomes very challenging for a small business to actually respond to this. Our profile is not focused on the small business. We're focused more on the large enterprise and that medium business. So we think from an economic point of view, those customers will survive this. Of course, everybody is impacted by it, but they'll certainly survive this. Now to your other question about what industries are certainly impacted by it. Certainly the hospitality industry, and we certainly do a lot of business with hotel industries, and we have cruise line companies. We do business with airlines. And they're certainly all being impacted by this. We're staying very close to those clients. We think they will come out of this. No question about that. That's not a concern. But there's certainly going to be a pause there from that perspective. And then anybody that's related to cloud is doing incredibly well, companies that have recurring revenue sources are going to weather this certainly better than others. The grocery industries, which we do a lot of business with, grocery industry. Of course, they're weathering this very, very well as you can imagine. Public sector clients will do very well. As we know the government will always find ways to spend more money, and they're getting lots of it. So the federal government, state and local, education, markets and so forth, we believe will get the right funding. So I think there'll be some bright spots in growth areas there.

Maybe getting a little bit too clever here. But on the conference call, you talked of sort of 3 things that are current at the moment; efficient supply chains, business continuity and security. Does that mean that digital transformation is kind of taking a little bit -- innovation around workflows and such like, is that taking a back seat for a while? I imagine it is.

Yes, a little bit. And probably that would be number four. If you had to list that, it will include four. But you're correct, Paul, as we see our clients -- certainly, all clients are looking for cost savings right now. They're all incredibly impacted by this. Every industry is impacted. So everybody is looking for cost containment, cost controls. So they certainly look through all parts of the budget to do that. So certainly looking at our very efficient supply chains and e-commerce engines, we can aggregate and we can actually save companies a significant amount of money in their IT procurement aspects of that. So that's certainly, first and foremost, and that's one of our solution areas that I mentioned that really helps, support that for clients. The second area, of course, is business continuity. That makes sense. We talked about that, how everybody is now working remotely virtually. And that will -- some aspects of that will become the new norm. As we discuss, these type of conferences might become much more the new norm than the physical presence as we're all getting used to the efficiencies. And I think if we were to tell the world 2 months ago that, hey, we're all going to be working from home virtually, we probably would have thought that it would have been a disaster, and it's actually working, right? You just -- you can look at all the different aspects of our society that's learning how to work remotely and communicate socially on weekends through collaboration tools, all those things are happening in a very big way. So business continuity is here to stay, and that's a very important area for our clients to really make sure that they can do that properly. And then the third area is security. One of the drawbacks, of course, is the fact that when you go more remote, you do expose yourself more to security situations. And of course, we all know that cyber and phishing attacks are at all-time high. That's become a real industry of sorts, and they see significant opportunities there. So helping our clients really secure their environment and providing the right protection, as they become more remote and more extended in their operations, is a critical need for them. And we see clients and even in some of the very much impacted industries like airlines and so forth, still spending a significant amount of money on security to ensure that their environment is protected. So those areas definitely are opportunities as well as very focused areas for our customers. And then as you mentioned, the whole area of digital transformation, which, of course, we've been on the journey for many, many years as a society, that's only going to continue to accelerate, I believe, when we come out of this because people are starting to understand just how much they're doing from a digital sort of e-commerce perspective. But digital is more than just Amazon and buying e-commerce online. It's how do you transform that experience with your clients, how do you transform your back office operation to make that as efficient as possible. So I think that's where we focus, of course, with our digital innovation practice to really help clients navigate and to position themselves well for the digital innovation era.

So as I listen to you, Ken, sort of -- it all sounds quite compelling from an investment perspective, right? You are in a rapidly consolidating fragmented market. The market itself has growth sort of vectors to it that are inevitable. You've just been talking about them. It really does seem like the real issue for investors is quite short-term in nature. So let's just talk about work-from-home for a moment. I guess the concern is that we're experiencing a sugar-high at the moment in your space. There's been a flurry of activities, people have deployed laptops and peripherals and some remote access software and collaboration tools, but that will be done very soon. I think on the conference call though you sort of hinted that there's a little bit of backlog still going into the second quarter. I didn't sound -- it didn't sound like we should get too excited though.

Yes. I think we certainly came out of Q1 with a limited backlog since there was tremendous demand for that. We do believe that we'll fulfill that in the second quarter. We don't think that it's going to extend into third quarter and fourth quarter. And then, we just had to look again like you suggested sort of the clouds in the horizon of, what does Q3, Q4 look like. But you are right, of course, it was so uncertain we didn't give guidance because as we try to navigate we're trying to understand what that real demand picture looks like. And the fact that you've got 15% unemployment, potentially going to 20%, depending on what numbers you believe. That certainly creates excess equipment that is out there that is going to get redeployed. So we don't know what that sort of pause might look like for the second half of the year. But certainly, those are things that we're positioning our company for, whether that be an opportunity or things that we need to control. But those, again, in our mind, like you positioned it, I think, are more short-term, but certainly the long-term trajectory and dynamics of this industry, we feel are very compelling.

I mean the other thing which is attractive about the story from a long-term perspective is there's not really a technology risk or an OEM risk here. You're too diversified for that to be the case. I mean, unless you made a wrong bet on something big. And I can't see why you would do that. That risk is really mitigated quite significantly for investors.

Yes, very much so. So we've got a very broad portfolio of products we'll actually sell. And this year, we'll sell 5,000 different partners product sets. As our customers look for us to be that sort of aggregation source for all different types of technologies. So we've got a very diversified set. Now of course, there's concentration. There's the top 30 vendors that we all know and love are -- will drive most of the technology, but there's lots of different offshoots of technology. So yes, we're not wedded to that. We don't make the products, so we don't have to navigate through those very, very difficult sort of product transition errors. And is that the right technology, and will it be overcome by different technology, we can pivot to that next technology for our clients.

So let's talk about the short-term then. What are you doing to prepare for this -- what are your assumptions around how deep and how long this is? What are you doing to prepare? And I imagine at some point Glynis might want to chip in and talk about the balance sheet and liquidity as well.

Yes. So certainly, the obvious thing, so looking at very carefully, of course, at discretionary type spending, not -- obviously, being very careful about any new hires into the company and letting attrition take its course. Managing all the things that you would expect that we've managed very, very tightly, certainly managing our cash position, which we feel have a very strong balance sheet, but certainly making sure that we're very judicious in that regard as well. So we feel comfortable with where we are in those positions. But again, also making sure as we know historically, there's always a big uptick in this business when we do come out of these. When you look at any of the crises, if you go back to 2008, 2009, 2010 saw an incredible uptick in the business. So you need to make sure you're also protecting the business so you can certainly benefit from when we do get back to that uptick and upturn that we'll experience in this industry, more so than most industries would experience certainly coming out of something like this crisis. So we believe we've managed through this before very successfully, and we've certainly positioned ourselves to do that today as well.

Can Glynis perhaps talk a little bit about the working capital cycle in a downturn and what happens with balance sheet and stuff.

Yes. She would love to.

Thank you, Paul. Yes. So we have enough liquidity with regard to the facilities we have in place in terms of managing Insight over the short-term and the longer term. We converted some of our facility, both of our long -- facilities last year to a fixed rate convertible note. So there's no refinancing risk associated with that in the short-term. It doesn't occur until 2025. And then we also have an ABL in place that gives us more than enough capacity to meet our needs today. The other thing about our business is that if you go back and look in the 2009, 2010 era is that our business spins off cash in the downturn. So we have payables that are -- that we pay on a shorter-term than our receivables. So as our payables start shrinking that AR is coming in. So it actually provides incremental cash flow in a downturn. Our cash flow cycle is countercyclical in the downturn. That also helps us, I think, in terms of preparing for that. But we've suspended our share repurchase program for now. And we were building out our corporate headquarters, and we put that on pause for now until we can make a determination and feel comfortable with the overall recovery in the economy and how we're going to come out of that. But we feel pretty comfortable with the liquidity and capital availability that we have. Can I just take 1 more second and address a question that we sometimes get, which is why didn't we draw down on our existing ABL facility because many companies have drawn down on their credit facilities just to have cash on balance sheet. And when we talk to our various banks, and we do our own assessment, we determine that today banks are significantly better capitalized than they were back in the 2009 era. And no bank in 2009, except for Lehman Brothers, actually defaulted on their committed facilities. And Lehman Brothers went bankrupt. But every other bank with a committed facility met those financing needs of companies. So we have a committed ABL. We have a bank group that is populated with the large banks across the country. And we feel pretty comfortable that we have access to that liquidity at any time that we need it. So there's no need for us to draw it down and keep it in cash on our balance sheet.

Ken, perhaps you can talk a little bit about the long-term business model. It's a slightly irritating kind of addendum from your perspective as I look at your nearest figure up here. And of course, their operating margins are significantly higher than yours. How do you think you're going to close the gap?

Yes. I mean, how we close the gap there, of course -- and by the way, a great competitor of ours. We respect them greatly. And we do that by, of course, growing our services business. We do it by also growing our mid-market business. And those, again, were a big part of the strategic elements of why we acquired PCM, was to build out those 2 elements of the business. So that becomes pretty important for us. And again, we think we're also differentiated from them in some areas like digital innovation, where we're really going to where the future is with the intelligent edge and where IoT will play in the future. And that might be taking, like you said, a little bit of a pause because of the COVID crisis. But we believe those elements are very, very strong for the future. And as we know, there's really 3 clouds there. There's the private cloud, which we all know, the traditional infrastructure; there's the public cloud, which we know is being dominated by 3 primary players today; and then you have the intelligent edge, which is really just sort of in its infancy. That will become the largest cloud as companies deploy more and more intelligent solutions at the edge. And that's just starting. We're in the very early innings of that starting. So having capabilities to help our clients make that transition and things like we've implemented, that we've developed, we call the connected platform, and the connected platform actually brings these IoT devices and sensors into 1 platform and makes it actually very scalable for a client. An example here today that we are experiencing is we've actually implemented a COVID detection and prevention system using our connected platform. So we've got a lot of interest from clients who have sort of -- their business models might be where they have large gatherings, whether it be theme parks or whether that be stadiums or warehouses, all those type of things, and are looking to say, how do I provide a safe way for the business to return to some sort of normalcy. And so what the connected platform does is we integrate actually thermal cameras and sensors, which are becoming somewhat popular now into that. We actually integrate sort of a cone technology that does monitoring to make sure people are keeping safe distances. It's got the capability to do -- to monitor, of course, anybody that has been sort of impacted or affected by any kind of virus or where that kind of distancing is and what is that sort of connection there so we can actually monitor that and report as well on that. And then even down simply to bringing into the hand sanitizing solutions integrated into this platform to make sure that your employees are actually utilizing it properly and on a continuous basis. All the way to -- if you're in a sort of an extreme sort of situation, we actually have a solution that's integrated as well. And this is sort of a detection center where we actually have a physical building that's very, very portable that actually does the testing. So you can imagine you come into a theme park, the thermal imaging cameras senses anybody that might have elevated temperatures. If you have an elevated temperature, they bring you to this little building location, and they actually do the actual testing on-site to determine that you're fine, you go right into the park, if not determine that no, entry is not accessible to this. So this is becoming very interesting. And again, not just for stadiums, but even people that have warehouses, in fact were implemented in our warehouse solutions as well as we speak to provide the kind of safety. So that's all part of this sort of IoT and connected edge and really more the digital world as we go forward. So those are the kind of solutions that we're pretty excited about that can integrate and they lend itself -- that platform lends itself to so many different applications. At the IT level, we're doing it in -- taking a little pause now, but we've integrated into multiple restaurants who are worried about food safety and how do they get these sensors into the refrigeration units and sensors into their ovens and then starting to realize, "Oh my gosh I can actually use this connected platform to look at the security cameras I have that can get integrated into" because everything operated very much in the silo. The security systems are all separate from everything else. This connected platform actually integrates it all. And at the edge, there's typically a server, but then everything goes into the cloud, the public cloud as well. So those are the kind of technologies that we're trying to differentiate ourselves, and we see some real meaningful opportunities longer-term to where clients really are going to look for solutions.

So I mean -- so you see technology really and the solution sets driving the margin expansion. How do you respond though to the argument that your nearest competitors that had this gigantic sales force, a very sort of deep sales culture, long-tenured people, et cetera? Is that also an opportunity for you? Or is it just very different business to yours?

No, I think it's very similar. And of course, as we talked earlier on, it's a huge market. So there's more than enough room for many of us scale players. So we would actually say, hey, they have a great business, and the real opportunity for us is that where the 80% -- 75% to 80% of the business is with these small players that are very, very small. We think that sort of opportunity is probably much, much bigger than us trying to compete directly with our largest competitor, much bigger opportunity for us.

So is sales productivity a key metric? I mean, of course, it's a key metric. I was wondering how key a metric is it for you.

Yes. No, it's a huge part of what we do. So continually investing there, making our people more and more productive is, of course, a key metric that we always address.

So what do you think the margin outlook could be in several years from now relative to today?

Yes. So at our Investor Day in October, many of the participants were there for that. We reiterated sort of 5-year journey of what we were going to focus on. And we made some commitments. I'll just go to -- go through those quickly. So we basically said over the next 5 years we'll grow 8% to 10% CAGR, which is faster than the market. We also said that we would expand EBITDA margin to 5% to 5.5%. We take our return on invested capital between 19% to 21%. And we would have services gross profit as a percent of our total GP at 50% to 52%, which is about 46%, 47% today. So we'd grow that. So those were sort of the very 4 key forward-looking areas that we committed to at the Investor Day to really monitor and to make sure that we could achieve.

Well, I think that pretty much sums it up. Ken, thank you very much to you and Glynis for participating today. We appreciate it.

Well, thank you for having us. We really appreciate it.

You are welcome. Well, it's nice to see you. All right.

Take care.

Bye.

Thank you.

You too.

Bye-bye.

Bye. Bye-bye.