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

Hello, everyone, and welcome to the Insight Enterprises Business Update Conference Call. My name is Bruno, and I'll be operating your call today. [Operator Instructions] I will now hand over to your host, Glynis Bryan, Chief Financial Officer. Please go ahead.

Thank you, Bruno. Welcome, everyone, and thank you for joining us for this special conference call. Today, we will be discussing the company's acquisition of SADA, which was announced in our press release earlier this morning. I'm Glynis Bryan, Chief Financial Officer and joining me is Joyce Mullen, President and Chief Executive Officer. If you do not have a copy of the press 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. At the conclusion of the scripted portion of this conference call, we will answer questions from participants. Today's call, including the slide presentation and the question-and-answer portion is being webcast live and can be accessed by the Investor Relations section of our website at insight.com. An archived copy of the conference call will be available approximately 2 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, December 1, 2023. 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 certain non-GAAP financial measures as we discuss Insight and SADA's financial metrics. When discussing non-GAAP measures, we will refer to them as adjusted. 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 on 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 statements 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're following along with the slide presentation, we will begin on Slide 3. Joyce?

Thank you very much, Glynis. Good morning, everyone, and thank you for joining us today. I am pleased to announce that Insight has completed the acquisition of SADA, a leading Google Cloud and technology consultancy and 6-time Google Cloud Partner of the Year. We acquired SADA for $410 million on a cash-free, debt-free basis, subject to certain customary purchase price adjustments. The transaction was funded through a combination of available cash on hand and our ABL facility. There is an additional earnout and incentive opportunity for the sellers of up to $390 million with a target of $210 million based on SADA's 3-year performance post-closing. This acquisition advances our strategy to become the leading solutions integrator and further strengthens our position as a multi-cloud solutions provider, adding both scale and expertise while enhancing our services profitability. We anticipate that SADA will add $0.20 to $0.30 to our adjusted diluted EPS in December 2023 and $0.55 to $0.75 in 2024. Glynis will walk you through some very important details regarding significant seasonality associated with the SADA business model. Over 75% of enterprises utilize a multi-cloud strategy. Insight is already recognized as a top Microsoft Cloud Partner worldwide. And with the addition of SADA, Insight is now considered among the top preferred partners across both the Microsoft and Google Cloud platforms. As clients' interest in generative AI solutions grows, we believe that the combination of Insight's strength with Microsoft Azure and SADA's strength with GCP positions us as a top partner in the 2 leading Gen AI platforms. Coupled with our strength in the infrastructure space, we expect to deliver even more value to our clients, partners and shareholders. SADA also strengthens our current position as an expert in data, artificial intelligence, cybersecurity, and intelligent edge solutions across the world's top hyperscalers, Microsoft Azure, Google Cloud and Amazon Web Services. Let me provide a little more detail on SADA's business. Headquartered in Los Angeles, California, SADA is a market-leading Google Cloud solution and service provider that has leveraged digital transformation by helping clients migrate and operate in the cloud. One of the largest Google Cloud platform partners globally, SADA has been recognized 6 times as Google Cloud Partner of the Year, including this past year 2023. SADA has approximately 850 employees across the United States, Canada, U.K., Ireland, Armenia and India. They bring over 400 engineers and technical experts with deep capabilities across several areas, including Google Cloud Platform, Google Workspace, security, data and Gen AI. Together, Insight and SADA will have more than 6,400 skilled certified consulting and service delivery professionals with the majority dedicated to developing multi-cloud and digital transformation solutions. SADA also maintains 10 Google Cloud specializations, including security, infrastructure, cloud migration, data analytics, application development and machine learning. The ability to bring even stronger GCP skills to our existing client base is a significant opportunity. Like Insight, SADA's client base spans multiple industry verticals, including health care and life sciences, technology, financial services, retail and more. SADA adds immediate scale to Insight's services business, net revenue, gross profit and gross margin. Additionally, as I mentioned, we believe this will be accretive to adjusted diluted earnings per share for 2023 and 2024. In summary, we are very excited about the capabilities that SADA will bring to Insight and the opportunity to unlock the value we believe exists within the combined businesses. With Insight's multibillion-dollar relationship with Microsoft and our status as a top Microsoft and Azure partner, this acquisition strengthens our position across the largest cloud hyperscalers in this important growth market. This is another step toward achieving our ambition of becoming the leading solutions integrator. We believe this strategy is important to our clients, our partners and our teammates and will enhance shareholder value. I'll now turn the call over to Glynis to walk through some of the financial details of this transaction. Glynis?

Thank you, Joyce. As Joyce mentioned, we have completed the acquisition of SADA and we're excited about the strong GCP capabilities and the profitability and EPS accretion that we can expect from this combination. We acquired SADA for $410 million on a cash-free, debt-free basis, subject to certain customary purchase price adjustments. There is an additional earnout and incentive opportunity for the sellers of up to $390 million, with a target of $210 million based on their 3-year performance post-closing. We funded the transaction with a combination of cash on hand and borrowing under our ABL facility. We expect to be comfortably within our acceptable leverage range. We expect to incur approximately $27 million in incremental interest expense over the first 12 months post-closing at current borrowing rates under our ABL. Financially, SADA delivered net revenue of $251 million in 2022 and gross profit of $200 million. SADA, exclusively a Google partner, has a large GCP practice, including cloud and digital consulting services. SADA's GCP contracts typically range from 3 to 5 years. Based on the current terms and conditions of these contracts, SADA is acting as an agent, and as a result, on the U.S. GAAP, the revenue and gross profit is recognized upfront on a net basis. An associated asset and liability for the full service amount not yet consumed is recorded on the balance sheet and is released over the contract term based on the client's actual consumption. This results in an increase in Insight's total assets and total liabilities of over $2 billion. Let me highlight some of the anticipated impact of SADA -- some of the anticipated impact that SADA will have in 2024. SADA's business reflects significant seasonality related to a concentration of client renewals in the fourth quarter. December was SADA's strongest month of the year. It is not indicative of other months of the year. We expect that SADA will contribute between $50 million to $60 million to EBITDA and between $0.55 to $0.75 to adjusted diluted EPS in 2024. This reflects SADA's expected operating performance as well as the anticipated interest expense on the acquisition debt. However, understanding the seasonality of SADA's earnings is important. Historically, SADA has generated lower-than-negative EBITDA in the first half of the year and significantly improved EBITDA in the second half of the year, particularly in the fourth quarter, driven by client renewals. In addition, given the high percent of netted revenue and the high gross margin from SADA, we expect that Insight's total gross margin will expand by over 100 basis points. As we close out the year and report our fourth quarter and full year 2023 financial results, in February 2024, we will provide historical financials of SADA and a pro forma view of their impact to Insight's historical financials. And we will appropriately reflect SADA in the guidance we provide for 2024. Moving on to 2023 guidance. With the closing of the transaction, we expect to incorporate SADA's December financials with Insight's consolidated Q4 and full year 2023 financials. Our original full year guidance from Q3 remains unchanged. We expect that SADA will add between $0.20 to $0.30 to adjusted diluted earnings per share. We now anticipate annual adjusted EPS of $9.60 to $9.90. Our updated 2023 full year guidance, including SADA, is now gross profit growth in the low to mid-single-digit range, interest expense between $47 million and $49 million, an effective tax rate of 25% to 26% for the full year, capital expenditures of $40 million to $50 million and an average share count for the full year of 34.8 million shares. In closing, we are thrilled about the value we can deliver to clients through the combined strength of Insight and SADA. We remain focused on the fastest-growing areas of the market and we believe this acquisition brings us one step closer on our journey to becoming the leading solutions integrator. This concludes our prepared comments, and I will now open the line for your questions.

[Operator Instructions] We do have our first question, comes from Joseph Cardoso from JPMorgan.

Congrats on the acquisition. Just first question from me. Can you just walk through how this deal materialized and whether SADA was shopping or it just took shape through other avenues? Just curious on the genesis and how it came to be given, I guess, the fast close, I guess, relative to our perception? And then I have a follow-up.

SADA did do a process. They hired an investment banker, and they did go through a process. I can't comment on how many companies were included in that process, but they did have a process. Independently, as we're a GCP partner, they're GCP partner, we've had relationships with the leadership of the SADA team via that GCP relationship. So I would say, it was a combination of the auction process as well as maybe SADA knowing a little bit about -- a little bit more about Insight that led to this successful conclusion of this project. We didn't think it was that quick.

No. Fair. I guess was there any reason that you guys can allude to in the sense of why they were shopping? Was there any structural issues? Or is it more just scale? Just curious.

No, I don't think, there were no structural issues. I think it was...

A family business.

A family business and maybe they're monetizing part of that in what's a good market in terms of the value that cloud platforms and Gen AI brings to the table. So it was an opportune time to exit, but there were no structural issues.

And worth the -- I think of noting that the management team will stay around for a while. There is an earn-out provision that is designed to do just that, and we're excited about that.

Awesome. I appreciate the color there. And then my follow-up question. When we think about the $250 million revenue outlined from SADA in '22, can you help us think about how much is accounted for Google versus potentially other partners in there? Because I guess what I'm trying to get to is if I assume a majority of that is from Google and kind of just simply layer on a high-teens growth rate, Google could represent mid-single-digit total of revenue by '26, but more in the double-digit range from a gross profit perspective. I guess just as you guys are standing here today and compare it even to the earnout associated with the deal, am I thinking about this correctly? Or am I over-appreciating something in that kind of back of the envelope math that I'm doing? Appreciate any color on that front.

So SADA is a 100% Google partner. So the $250 million of revenue is completely associated with Google businesses. It includes not only resale of Google Cloud and various other products, but it also includes a significant services business. So you are right to say that one of the things that we found attractive about this is because we do believe that Google Cloud is going to -- cloud in general, will be -- continue to be a fast-growing area of the market. And we are excited about the additional scale associated with our ability to grow in the Google Cloud space as a result of this. I'm sorry, Joe, there was another question in there, but I'm not sure I caught it.

Yes. I mean it was just more of a function of whether Google can represent a material customer, particularly, obviously, you have the earnouts associated with the deal. So there is some visibility in terms of targets that you're trying to hit by 2026. So just curious like is it correct to think of Google being -- and obviously, I don't want to put words into your mouth, but mid-single-digit revenue, double digit from a gross profit perspective by the time we get out to 2026. Is that like a fair assumption in terms of how much Google or how big Google can be sitting in kind of the Insight portfolio, or am I thinking about something way off and over-appreciating something there?

So I think if you're talking about total Insight, I would say, no, it wouldn't get to double digits. If you're talking about potentially the cloud view of the world, it could get to double digits as a percentage of our total cloud business by 2026, but not as a percentage of total Insight on the revenue line. And I think as we said, Microsoft is a multibillion-dollar relationship so it's going to take a while. Yes.

Got it. I appreciate the color there. Congrats again on the acquisition.

Our next question comes from Matt Sheerin from Stifel.

Just a couple of questions for me. Just one in terms of, obviously, a big opportunity to expand your presence with Google Cloud. You have a very strong Azure practice. I know you've got some AWS exposure. Where are the cross-selling opportunities in terms of the enterprise customers that SADA deals with versus opportunities for you to cross-sell as you mentioned, 75% of enterprises are multi-cloud? So as you factor in your forward or strategic plan with SADA, does that also contemplate cross-selling and incremental opportunities for market share?

As we've said a lot of times, Matt, we're very focused on the fastest-growing areas of the market. We do think that our capabilities around -- I mean, around multi-cloud are significantly augmented by the acquisition of SADA. And that's not only Microsoft. It is also across our AWS practice but also across the on-prem infrastructure capabilities that we have for on-prem cloud. So we do expect this gives us significant scale. We know that we have lots of customers who are interested in talking to us about multi-cloud. This improves our capabilities and skills, extends our capabilities and skills with Google. And I think if you think about SADA's customers, they get the same request for multi-cloud. So we do see an opportunity to improve the overall level of value that we can contribute to our clients and deliver to them. So certainly, that is how we're thinking about sort of 1 plus 1 equal 3.

Okay. And then relative to your guidance for accretion next year, does that contemplate any opportunities to cut costs? I know obviously, they're Google-only. So that's a separate business. They've got lots of operations. But are there opportunities in terms of back office or other finance and other things where you can get some costs out and is that part of the accretion?

So we -- there might be some cost synergies in the future. But in the near term, we plan on having SADA run independently, and that is not our focus. So our focus is on revenue.

And to be fair, the accretion is coming from the SADA business performance that we anticipate getting in 2024 and beyond, independent of any cost synergies or revenue synergies, which will come.

Our next question comes from Anthony Lebiedzinski from Sidoti.

Congrats on getting the deal done. Can you speak to the growth rate that the SADA has experienced over the last few years? And maybe just talk about as far as the customer overlap between Insight and SADA, just wondering if there are any -- if there's a notable number of incremental clients that you're picking up as a result of this deal?

So on the customer overlap, SADA has about 3,000 customers, and they are, as I said, the premier cloud MSP in North America. And they, as I said, have sort of -- they're pretty well dispersed across multiple verticals. And as you know, we have a significant presence in most North American customers. So -- and we see about that same ratio inside the SADA customer base. But we still see -- we have very low share of wallet in those customers anyway, and I think there's significant opportunity to expand that.

Got you. Okay. And then as far as the growth rate that SADA has had over the last few years, can you speak to that?

Anthony, we're going to be putting out an 8-K or in our 10-K in February, we'll detail out the normal requirements in terms of 2 years of performance that we have to put out for the 8-K since this is a material acquisition. So all that information will be available in February when we move forward.

Okay. So we'll stay tuned for that, okay. Got you. And then in terms of the 2024 outlook for EBITDA of $50 million to $60 million, what are you assuming for gross profit? What's the math behind that as far as to get to that EBITDA number? What are you assuming for gross profit to adding because of SADA?

We're not really giving guidance for 2024 independently of just SADA. And all we're sharing right now on SADA is the $50 million to $60 million of EBITDA. But if you look at the historical what we gave you, we gave you $251 million of net sales and $200 million of GP, I would anticipate that's what -- not only would I anticipate -- we anticipate that's what we will see going forward.

[Operator Instructions] Our next question comes from Adam Tindle from Raymond James.

Congrats on the deal. I just wanted to make sure I understand, just had a couple of clarification questions. Zoning into the $50 million to $60 million of EBITDA, could you just help us understand how that compares to SADA as on a stand-alone basis? Is that just basically taking what the EBITDA was over this past year and layering it into the Insight model? Or are there growth assumptions embedded in that?

So the $50 million to $60 million is unique to SADA. It's only SADA in that number. We had a model -- an acquisition model, that we used as a basis for the valuation for the purchase price that we came up with, plus the earn-out structure that we included in the 8-K. And so that is based on SADA's performance -- anticipated SADA performance in 2024 and beyond, albeit we expect SADA management to deliver more than that. But for now, that's what we're -- that's what we've included in our guidance going forward.

Okay. So you sound confident in that number. I mean, is there a way that you could maybe help us with what SADA was on a stand-alone basis in 2022, for example, just relative to that $50 million to $60 million?

No. Sorry. No, not now. But we'll do that in February. We'll give you the 2021, '22, '23, year-to-date -- 9/30 year-to-date history in February.

Okay. I mean I think what investors would like to understand better is just kind of what assumptions, obviously, it looks very attractive on the surface on that $50 million to $60 million, but we're not sure how that compares to historical SADA performance and what you're assuming in that growth rate?

It compares well to SADA historical performance. We are confident in the number. Can I just make a comment, Adam, that part of the reason for this call, besides the fact that it's a significant acquisition in that it advances our strategy to be -- to becoming that leading solutions integrator is the seasonality associated with the business. I don't want anybody to overlook that, right? So we have $0.20 to $0.30 in the month of December in terms of EPS accretion that we're anticipating from SADA. We didn't want anybody annualizing that number and thinking that was what SADA was going to be contributing in total. It is not to imply that SADA's business is falling off in 2024. In case there's some confusion there, maybe we weren't clear about that. But December is by far SADA's largest month. And what we see in 2024 is a consistent trend. Q4 is still going to be the largest quarter and I know what you're thinking that the business is declining in 2020 -- 2024 because we gave you the $0.20 to $0.30 of EPS accretion in 2023 for the month of December only. Does that help clarify it? SADA's business is healthy. We're not concerned about a decline in the business.

Okay. Yes. That makes sense. So with these big renewals and back-end loaded year in big seasonality, how did you think about protecting against customer churn in that, especially in the middle of a deal? How do you kind of protect? Is there -- maybe just go into some of the contractual provisions or anything that give you confidence in protecting against churn?

So SADA's clients actually commit to the GCP and could be -- to the GCP agreement for whatever the term is, 3, 5 years. So if the client were to leave, the client is still obligated. They can't just -- the client cannot just walk away. So the issue around churn is more limited, I guess, I would say. So at the point of renewal or maybe sometimes based on usage, they may renew early. There may be a motion to renew early, but I don't think churn -- churn is not something that we're concerned within the SADA client base.

Right. And we've obviously looked carefully at the client satisfaction and the renewal rates and things like that, and we feel very good about it. SADA is Google Partner of the Year partly because they deliver a great client experience.

And they have the confidence of the Google field sales team as well in terms of their ability to transact with that Google sales team, and their churn has been minimal in their history.

Okay. That's helpful. And just sorry, one more clarification. I'm trying to understand the earnout, which I understand those structures. So at the target of $210 million on an earnout, what your -- would that be assuming EBITDA of $50 million to $60 million? Because what I'm trying to get at is we've got $410 million for...

No.

Okay. Help me with that please.

So Adam, we have a management plan that we're holding the Google management team accountable for. That is -- it is the Google. It is a SADA management plan. We're holding the SADA team accountable for that. As any prudent CFO would do, we have discounted that a little bit with regard to what we think is going to happen in the first year, specifically 2024. There's always a little bit of noise when you -- 2 companies come together, I think our cultures are a really incredible match. We here are very excited about what SADA can do for us. But there's always a little bit of noise when 2 companies come together and 2024 may be a little bit impacted, but the SADA criteria is higher than what we're seeing right now for 2024, and it is a 3-year earnout, it's '24, '25 and 2026. It is actually in the 8-K, not the dollars, the dollars have been redacted, but the structure of the earnout and the min and the max in terms of what SADA would receive, the SADA leadership team would receive is detailed out there. And I just get a sense maybe we're thinking the SADA business is not strong. That is not the case at all. It is a strong, very flexible business, which is why the accretion is, I don't know, as high as it is, potentially.

Right. And the $50 million to $60 million, Adam, is just for 2024.

Just for 2024, yes.

Okay. Yes. And Glynis, I did notice the redaction. So I think what I'm trying to get at is to understand the valuation multiple that you paid here, right? So $410 million is the base. On $55 million of EBITDA, it's a 7.5x deal. But I don't think we're factoring in properly the earnout in that. I would -- I'm just trying to understand, at $50 million to $60 million, would there be a $210 million earnout on top of the $410 million? Does that make sense?

Oh, I see what you're trying to do. Now you're trying to -- so I think if you want to think about the $210 million, the $210 million is the earnout at target, as you can see from the 8-K information that was filed. So if you look at the $210 million plus the $410 million, that $620 million is an anticipated purchase price that we believe ultimately is in a multiple comparable to Insight range -- EBITDA multiple comparable to Insight range, slightly lower. But remember, if you want to highlight this... Go ahead. Sorry, I interrupted you.

That's okay. I think that's just surprising given the mix of business, the margin profile, what this is to have it be below interest valuation multiples. It's just going to raise a lot of questions. And I know we've got to wait for more details in 8-Ks and stuff to come out. I think there's going to be a lot of questions on what are we missing here.

So you're concerned that the multiple we acquired at that is too low. Therefore -- not too low, but is low. So therefore, there's something wrong? Just trying to understand to maybe address it.

Yes, that would be -- it looks like a great deal, just to be very clear. And I'm just kind of like what's -- what would we find out in the 8-K? Is this growth deteriorating? Is there something that would cause it to be such a lower-multiple deal? If that makes sense.

We do think it's a really good deal.

We do think it's a really good deal. I don't think of it as being a low-multiple deal, to be clear. I don't think of it as being a low-multiple deal. I don't think there's anything wrong with the SADA business. We actually are excited about the incremental value that we think we can generate together through the combination of Insight and SADA that will make this accretive -- even more accretive for our shareholders. That's what we're excited about, that opportunity that lies ahead of us. And we had talked about acquisitions accelerating our strategy and the metrics that we laid out in -- for 2027, back in our Investor Day in October of 2022. And we think that this is a significant step in that direction.

And I know we'll talk more about it next week at our conference, but congrats on the deal. Looks great.

Our next question comes from Vincent Colicchio from Barrington Research.

Yes. Please remind me, did you have any Google expertise prior to this transaction?

Yes, we did, Vince. We did have -- we have a -- I would call it a significant Google practice, but obviously, nothing like the scale and expertise that SADA brings to us. So it's accretive in that sense, meant to be, for sure.

So it's a meaningful increase in the capability set?

Yes. More service, et cetera.

And how did the multiple -- I assume you looked at other similar assets. How did the multiple you paid in this transaction compare to sort of the thing -- other similar assets you're seeing in the market today?

I think part of our analysis would say that it's a comparable multiple. We have our board clearly on an acquisition of this size first required an honest opinion. So they got a view of different multiples and transaction valuations as part of that comparison. So I think we feel pretty comfortable with the multiple that we paid.

And how is it compared to what we were seeing, say, a year ago? Have they come in?

I would say a year ago, multiples were higher, and we've seen them moderate a bit with interest rate increases.

Okay. Seems like a nice deal. Thanks.

We currently have no further questions. So I would like to hand the call back to Glynis for closing remarks. Thank you.

Thanks, everyone, for joining the call this morning, and we appreciate your participation, and we'll talk to you more in the future. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect.