Glynis Bryan - CFO Ken Lamneck - CEO & President.

Adam Tindle - Raymond James & Associates.

Welcome to the Insight Enterprises First Quarter 2016 Operating Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Ms. Glynis Bryan. Please go ahead..

Welcome, everyone and thank you for joining the Insight Enterprises conference call. Today we will be discussing the Company's operating results for the quarter ended March 31, 2016. I'm Glynis Bryan, Chief Financial Officer of Insight. And joining me is Ken Lamneck, President and Chief Operating Officer.

If you do not have a copy of the earnings release that was posted this afternoon 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 be accessed by the Investor Relations page 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 associated webcast contains time-sensitive information that is accurate only as of today, April 28, 2016. This call is the property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Insight Enterprises is strictly prohibited.

In today's conference call, we will refer to non-GAAP financial measures as we discuss the first quarter 2016 financial results. You will find a reconciliation of these non-GAAP measures to our actual GAAP results included in the press release issued earlier today.

Finally, let me remind you about forward-looking statements that will be made on today's call. All forward-looking statements that are made in 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 annual report on Form 10-K for the year ended December 31, 2015. With that I will now turn the call over to Ken to give you an overview of our first quarter 2016 operating results.

Ken?.

Thanks, Glynis. Thank you for joining us today to discuss our first quarter 2016 operating results. In the first quarter of 2016, consolidated net sales were $1.2 billion, down 4% year-over-year in U.S. dollars and down 3% in constant currency.

Modest growth in North America business was more than offset by lower net sales reported in EMEA and Asia-Pacific. Gross profit of $161 million in the first quarter was flat year-over-year in U.S. dollars and up 1% in constant currency. Gross margin increased 50 basis points year-over-year to 13.8%.

This increase was primarily due to a higher mix of software, maintenance and cloud sales, for which revenue and cost of goods sold are reported net in our financial statements and higher gross margin in our EMEA and APAC operating segments. Consolidated sales and administrative expenses were $146 million in the first quarter, up 4% in U.S.

dollars and 6% in constant currency, reflecting investments across the business but most notably in North America. Earnings from operations, excluding severance and restructuring expenses, decreased to $15 million. On a GAAP basis, earnings from operations decreased to $13.6 million.

And diluted earnings per share [Technical Difficulty] severance and restructuring expenses were $0.21. On a GAAP system, diluted earnings per share were $0.18. Overall for the quarter, EMEA and Asia-Pacific business delivered strong earnings growth year-over-year. Our North America business has not met our profitability expectations in recent quarters.

This has been related to a combination of a higher percentage of large and public sector clients, as well as a shift in product mix resulting in lower data center sales. This could be somewhat cyclical, but market data suggests softer demand for data center solutions and we're cautious about recovering our product mix over the balance of the year.

We continue to be excited about our potential in North America but believe that we need to take action to support a long term profitable growth. To that end, we recently concluded several cost reduction initiatives across our U.S. business that will allow us better to align our cost structure with current gross profit performance.

Annualized savings from these actions are expected to be approximately $20 million, beginning in May of 2016. In EMEA, net sales decreased 11% year-over-year in constant currency in the first quarter. Hardware sales declined 13% due to lower volume in our UK business.

Software sales declined 9% due to a higher mix of cloud sales which, similar to software maintenance sales we have previously discussed, are recorded net in our financial statements.

Despite softer market conditions and the effect of the shift to higher cloud delivery software sales, our EMEA team focused on profitability and delivered growth in our gross profit dollars while decreasing operating expenses which drove non-GAAP earnings from operations growth of more than 30% in the first quarter, all in constant currency.

In Asia-Pacific, we're also pleased with our first quarter operating performance. Like in EMEA, we saw a higher mix of cloud sales and software maintenance sales which drove our reported sales down year-over-year, but gross profit grew 14% while operating expenses grew only 2%, both in constant currency.

[indiscernible] earnings from operations growth year-over-year. As we enter the second quarter of 2016, we continue to be excited about our capabilities, our partnership clients' appetite for our solutions and our long term prospects to grow profitably by delivering IT solutions to these clients.

Our strong data center software and services capabilities and our new leaner cost structure will position us to achieve our 2016 core business goals. I will now hand the call over to Glynis, who will discuss our first quarter financial results in more detail.

Glynis?.

Thank you, Ken. Starting with North America, net sales in North America were $827 million in the first quarter, up 1% year-over-year. Sales in our hardware category increased 3%, due primarily to higher sales of client devices, partially offset by lower data center products.

Services sales grew 11%, including the contribution of BlueMetal which added to our business last October. And software sales grew to 6%, due to a higher mix of software and cloud sales reported net. As Ken mentioned, as clients consume more of their software through the cloud, we will see our topline results shift to more sales reported net.

In the first quarter, we saw this across all three of our operating segments, in addition to the typical variances in mix of license versus maintenance sales and we expect that the trend will continue.

But I want to point out that, while we believe this will have an impact on our reported topline results, it should not affect the profitability of our software category.

Gross profit in North America was flat year-over-year $112 million and the gross margin decreased 10 basis points to 13.5%, due to lower hardware product margins due to clients and business in the quarter. Selling and administrative expenses for North America in the first quarter were up 8% or $7.6 million year-over-year, to $100 million.

About half of the increase year-over-year was due to headcount investments and the addition of BlueMetal to our business and the balance is due to significantly higher healthcare expenses this year. We also recorded approximately $1.2 million of severance expense in this segment in the first quarter related to restructuring actions in this quarter.

These actions are expected to result in approximately $20 million in annualized cost reductions, of which $13 million to $15 million will be realized through the end of 2016.

Earnings from operations in North America were $11.7 million in the first quarter of 2016, down from $19.1 million in the same quarter last year, excluding severance expenses in both periods. Moving on to EMEA, our EMEA operating segment reported net sales of $303 million, down 15% year-over-year in U.S. dollars and down 11% in constant currency.

Also in constant currency hardware sales decreased 13% and services sales decreased 8% due to lower volume with large and public sector clients. Software sales increased 9% due to higher mix of netted software and cloud sales. Gross profit in EMEA was $83 million, a decrease of 3% year-over-year in U.S.

dollars but an increase of 1% in constant currency terms, with gross margin increasing 180 basis points - sorry, 170 basis points, to 14.3%. This increase in gross margin was driven primarily by the effect of higher netted software sales and includes a hardware product margin with declines in the quarter.

Selling and administrative expenses in the first quarter were down 5% in U.S. dollars to $41 million and down 1% in constant currency terms. This decrease was due to lower facilities and administrative costs. In the first quarter we reported net severance expense of $24,000 in this segment, down from $318,000 reported in the same period last year.

Earnings from operations in EMEA reached $2.7 million in the first quarter of 2016 compared to $2.1 million reported last year, excluding severance expense in both periods. In our Asia-Pacific operating segment, net sales were $39 million, down 8% year-over-year in U.S. dollars and down 3% in constant currency.

Gross profit was $5.9 million which was up 8% year-to-year in U.S. dollars and [Technical Difficulty] in constant currency terms. Selling and administrative expenses impact increased to 2% year-over-year in constant currency usually it's earnings from operations of $425,000, up from a loss of $151,000 reported last year.

With respect to total tax rate, our effective tax rate in the first quarter was 38.2% compared to 38.4% in the first quarter of 2016. Moving on to our cash flow performance, our operations used $47 million of cash in the first quarter of 2016 compared to generating $21 million in the same period last year.

This use of cash was in line with our expectations due to a single significant client receivable collected in the fourth quarter of 2015, for which the related payable was paid according to its terms in the first quarter of 2016. We invested $2.9 million in capital expenditures in the first quarter of 2016, down from $2.2 million last year.

And we had $13 million to repurchase approximately 505,000 shares of our common stock compared to $39 million last year. As of March 31, we have $37 million remaining under our share authorization.

All of this led to a cash balance of $174 million at the end of the first quarter, of which $148 million was residential in our foreign subsidiary and we had $140 million of debt outstanding on our revolving debt facility. This compares to $186 million of cash and $96 million of debt outstanding at the end of last year's first quarter.

And from a capital flow efficiency perspective, our cash conversion cycle was 29 days in the first quarter of 2016, an increase of four days year-over-year due to the relative timing of client receipts since the prior payments in the quarter. I will now turn the call back to Ken..

Thank you, Glynis. Moving on to our outlook for 2016, for the full year of 2016 we continue to expect our business to deliver topline growth in the low to mid-single digit range in U.S. dollar terms. We also continue to expect diluted earnings per share for the full year 2016 to be between $2.25 and $2.35.

This outlook reflects the adverse effect on gross profit of previously announced partner program changes in the software category which the Company expects to be between $5 million and $10 million; the positive effect on sales and administrative expenses of recent cost reduction in North America which the Company expects to be approximately $13 million to $15 million over the balance of 2015; an effective tax rate of approximately 37% to 38%; completion of the balance of our share repurchase program of $37 million, leading to an average share count of approximately 37 million shares for the year; and capital expenditures of $10 million to $15 million.

This outlook excludes severance and restructuring expenses incurred during the year. Thank you again for joining us today. I want to thank our teammates, clients and partners for their dedication to Insight. That concludes my comments and we will now open your line up for questions..

[Operator Instructions]. Your first question comes from Adam Tindle with Raymond James. Your line is open..

Maybe one for Glynis and then one for Ken. Just wanted to understand on the guidance, low to mid-single-digit revenue growth in 2016 implies significant acceleration, given the first quarter was down 4%. So, maybe you could help me understand. It doesn't sound like your market outlook has improved.

Is there visibility into backlog or what are the underlying assumptions to give you confidence in that outlook?.

So I think we have confidence in the ability for our business to generate revenue. Let me just say that upfront. But I think there are a couple other things that will help us as well.

We have the opportunity in the second half of the year to take over the group of up to 200 teammates that will be on the Insight salesforce and they will be productive at the time that we take them over.

They are currently in roles today where they are servicing a partner and that's going to help us with regard to generating incremental revenue growth in the second half of the year that was not in the original guidance that we gave. So we feel confident that the low to mid single-digit revenue range that we put out there.

I will stop there and you can ask further questions..

And you will find also, Adam, that if you look at the consensus modeling that was done, it was pretty much on track for Q1 from a revenue point of view. In GP, SG&A was where we were off. And of course, we've adjusted that. So, our modeling is not far from yours in regards to that, in the original guidance that we've given you.

So we remain confident that we will be able to achieve those numbers that we've guided to..

Okay. And I guess along those same lines on the EPS line, as I look back historically, the first quarter typically represents about 15% or so of total EPS for the year. But, based on this guidance for 2016, it would be less than 10% of the $2.30 midpoint.

So, maybe help me understand how you're thinking about the differences this year in terms of the EPS acceleration throughout the year.

Is that perhaps the cost-cutting or what gets us to that number?.

I think it's going to be a combination of a couple of things. One is, for sure, the cost-cutting ultimately would help.

I think that, as you look out through the year, what you're going to see is we're going to have a normal seasonality around our revenue in Q2, Q3 and Q4, maybe a little bit of acceleration in Q3 and Q4, given our Insight sales opportunity.

What you will see is that, in Q3, we had a very strong Q3 of 2015, so in Q3 of 2016 we're anticipating it's going to be down on a year-over-year basis relative to the performance that we've had at the - this is at the operating income line - relative to the operational performance that we had in 2015.

I think in 2015, if you remember, our North America business grew by 15% followed - and that was on top of a 10% growth in the second quarter of 2015.

So we're not anticipating that same growth rate in 2016, so we will see softness in our Q3 operation for 2016, but we feel confident with the initiatives and the cost-cutting initiatives that we've made as well as the performance that we're getting out of our EMEA operations and APAC that we will be able to [Technical Difficulty] our guidance range of the $2.25 to $2.35 that we previously stated..

Okay.

And if I could just maybe ask one more, a more strategic question, just trying to understand the cost cuts to SG&A in North America, given the focus on hiring in the region last year and also the decision to take on the additional inside sales reps that you mentioned a few weeks ago in SMB with a focus on data center which you've noted caution around as far as the macro environment there..

Yes. So I'll adjust that, Adam. So when you look at the cost cutting that was affected, it involved a couple of areas. It wasn't just all sales-related headcount, by any means; there was actually a small portion of headcount was affected by this, but it was across the board.

In looking at efficiencies and productivity across the board, as you know, we've invested a lot in IT systems over the past few years. So we're getting more efficiencies there as well. So, the headcount increases that we've done over the last few years, of course, were primarily all in sales-related and technical sales-related type individuals.

So, those adjustments that were made really were just made for productivity reasons and performance against that. So again, a smaller portion of that came out of that pool of individuals.

As far as the research that we're taking over in Conway, Arkansas, that represented a pretty unique opportunity for us to take on individuals that are well-trained at this stage of their careers that can hit the ground running. And while we said there is softness in the data center, it certainly doesn't mean that we're shying away from that space.

I think the NPD data would reflect that there was softness in Q4 and Q1 in that area, but it's still a very large segment. In fact, it's the second largest segment of the business. So there's big opportunities for share gains in that area; and these individuals, of course, are very trained in that space.

So we see that as, again, a significant opportunity for us to grow our business and continue to expand and certainly start to become more significant in the SMB space..

Okay. So just one follow-up there - in terms of the additional adds, how should we think about the productivity metrics? I know you mentioned hit the ground running.

And is there a reason that revenue per employee or gross profit dollars or employee would be different from the corporate average for this set of employees?.

Yes, Adam. You should look at it is primarily a second-half initiative. And you should look at it that the GP dollars generated will be neutral to the SG&A costs, so it will be EFO neutral but we don't believe there will be any disparity there. And we're modeling, for your benefit, for the second half from a revenue point of view, about $75 million..

Your next question comes from [indiscernible] with Stifel. Your line is open..

Could you please elaborate on your comments around data center, North America, what you are seeing there and how the provision in terms of end markets there?.

So when you look at the data that we track, of course and I'm sure you do, from MTD which is probably the best source that we have, indicated that for - that storage was down significantly in Q1 in the North American space. Networking was down as well, not nearly to the same magnitude, but it was down. And servers were up, actually, slightly.

So when we look at that overall, certainly a negative growth rate for what you put together as data center for the market in Q1 according to the NPD data..

And are you focusing more on a Flash biz side, like some of your competitors? Is that true or--.

Well, we think that there's still a significant opportunity in hybrid cloud with private data centers. We also still believe strongly, even if you take the utmost case of moving towards the cloud, we still - certainly, a big need for the network. The network continues to grow and expand in all environments, whether it's public cloud or private cloud.

So, long term we're certainly bullish on what the network opportunity remains. Certainly, the corporate storage we think, longer term, certainly gets impacted. I think it's going to be, certainly, a slower migration, especially in large and midsized clients..

Okay, got it, got it.

And on the cost action you announced, like $20 million start rolling off beginning in May, so how should we think about it? Should it be like casually, over quarters or like - can you provide any clarity on that?.

Yes, so we basically say it's $13 million to $15 million for the remainder of this year. And you can model that starting effective May 1..

And looking at EMEA region, sales were down like 15% year-over-year.

Can you talk about what you are seeing there in terms of the regional demand and shift in product mix?.

Yes, so the data we have from - we don't have all the data in front of market share point of you. But when we look at from a hardware perspective, it looks like certainly the market when down, from the preliminary data. We really only have January and February data in, in the market. We don't have March's yet consumed.

But we do believe, by the trends that we're seeing, that certainly the net effect will be that hardware revenue will be down in the region overall that we're seeing. And that seems to complement from some of the distributor data we're seeing as well that the hardware market was down in the period. For us on the software side, we were down.

A lot of it has to do with the netting effect where, again, more comes in cloud. So when we focus on software we're really focused on the GP dollar effect because so much is netted. And that business performed reasonably well for us..

[Operator Instructions]. I'm showing there are no further questions at this time. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect..