Good morning, everyone. And welcome to the Insight Enterprises, Inc. Second Quarter 2023 Earnings Conference Call. My name is Jess, and I will be the coordinator for your call today. I would now like to hand over to your host, James Morgado, Senior Vice President of Finance and CFO of Insight North America to begin. James, please go ahead.

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 June 30, 2023. I am James Morgado, Senior Vice President of Finance and CFO of Insight North America. Joining me is Joyce Mullen, President and Chief Executive Officer; and Glynis Bryan, Chief Financial Officer. If you do not have a copy of the earnings release or the accompanying slide presentation that was posted this morning and filed with the Securities and Exchange Commission on Form 8-K, you will find it on our website at insight.com under the Investor Relations section. Today’s call, including the question-and-answer period, is being webcast live and can also be accessed via the Investor Relations page of our website at insight.com. An archived copy of the conference call will be available approximately two hours after completion of the call and will remain on our website for a limited time. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, August 3, 2023. This call is the property of Insight Enterprises. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of Insight Enterprises is strictly prohibited. In today’s conference call, we will be referring to non-GAAP financial measures as we discuss the second quarter 2023 financial results. When discussing non-GAAP measures, we will refer to them as adjusted. You will find a reconciliation of these adjusted measures to our actual GAAP results included in both the press release and the accompanying slide presentation issued earlier today. Also, please note that unless highlighted as constant currency, all amounts and growth rates discussed are in U.S. dollar terms. As a reminder, all forward-looking statements that are made during this conference call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in today’s press release and in greater detail in our most recently filed periodic reports and subsequent filings with the SEC. All forward-looking statements are made as of the date of this call and except as required by law, we undertake no obligation to update any forward-looking statement made on this call, whether as a result of new information, future events or otherwise. With that, I will now turn the call over to Joyce and if you are following along on the slide presentation, we will begin on slide four. Joyce?

Thank you very much, James. Good morning, everyone, and thank you for joining us today. Q2 was more challenging than expected and our performance was below our expectations. Although we did not achieve the results we anticipated, we are pleased with many of our key performance indicators that confirm we are making progress on the strategic and financial goals we previously outlined. Here are a few highlights. We achieved a record gross margin of 18.4% as we continue to make progress on our sales mix and pricing and profitability initiatives. Insight core services gross profit grew 7% and cloud gross profit grew 12% and both are key drivers of our solutions integrator strategy. Adjusted EBITDA margin was 5.9%, up 50 basis points and we generated $188 million of operating cash flow in the first half of the year. These are proof points that demonstrate we are on the right path. Although we are at the beginning of this journey, we continue to gain traction in the fastest growing areas of the market, cloud, data AI, and edge, which importantly align with our areas of expertise. In addition to our focus on growing our business, we are implementing further cost reductions designed to improve the efficiency and effectiveness of our operations and preserve capital for key areas of investments, including M&A, that support our strategy. Glynis will provide more details. Considering our Q2 results and our current expectations for the second half of the year, we are lowering our full year adjusted diluted EPS guidance range to $9.40 per share to $9.60 per share, which reflects a 4% year-over-year growth at the midpoint. The long-term dynamics of the IT market are very strong and our clients remain committed to digital transformation and leveraging technology, including generative AI, to improve efficiency, reduce risk and deliver a better customer experience. We are confident that we will see a resurgence in buyer confidence and demand in the midterm. As a reminder, there are four key pillars underpinning the strategy that we outlined last fall at our Investor Day. First, captivate clients. This is all about delivering exceptional value to our clients. We pride ourselves on delivering high quality outcome-based solutions and earning the right to do more. This leads to our second pillar, sell solutions. We are transforming our sales capabilities and aligning our incentives to focus on our solutions portfolio. The theme here is really about focus, doing a finite number of things and doing them really well. Our third pillar is deliver differentiation, this is all about providing innovative scalable solutions through reusable IP, exceptional technical talent and our very compelling rich portfolio. Again, we are focusing on our strength that align with the fastest growing areas of market and where our clients need the most help, cloud, data, AI, cyber, and edge. And the fourth pillar is champion our culture. This has been a strategic advantage for us and is critical to attracting and retaining incredible talent. Our ambition to be the leading solutions integrator requires a deep understanding and a passion for technology and our solutions team continuously strives to develop and refresh our IP. We recently launched our proprietary Insight Lens for generative AI. This configurable ready-to-deploy modern data platform solution helps organizations quickly design, build and deploy infrastructure to support generative AI platforms. A key element of our solutions integrator strategy is our deep partner network and we collaborate with industry technology leaders in their respective domains. For example, as NVIDIA’s 2023 Americas Retail Partner of the Year, our technical experts work closely with NVIDIA to help our clients leverage best-fit AI, data analytics and machine learning solutions. At the very heart of generative AI is data, this is one of our core capabilities and it’s critical to effectively implementing AI projects. We have been helping clients manage and improve their data estates for many years. I will describe a couple of client use cases that are in progress leveraging generative AI. For example, we are working with a recruiting firm to reduce the time and effort associated with matching candidates to roles. We are building a solution that retrieves job postings and other hiring metadata and aligns those with candidate profiles to identify strong potential matches. We are leveraging Insight Lens for generative AI to streamline the development time. In another example we partnered with a global technology distributor to take a proof-of-concept OpenAI and conversational agent to full production. The goal of this project is to drive accuracy in the responses and streamline retrieval of information while carefully controlling the user's access to information. We are also partnering with this client to develop their generative AI roadmap and develop a detailed technical plan. Although it’s still early for generative AI, our solutions team has been implementing AI and machine learning solutions for many years. For example, we have built a solution for one of our clients that utilizes machine learning to create targeted treatments for patients with high blood pressure. The recommendations were based on nearly 800 data points per patient, including patient symptoms, medications, and risk factors. This solution has led to more personalized care, improved patient quality of life, healthcare cost savings, and improved treatments. With machine learning at the core of the solution, our client is significantly improving hypertension care. We are proud of the solutions we deliver to our clients, which are validated by the numerous industry recognitions we received. We are pleased with the nine 2023 Microsoft Partner of the Year awards we have recently won, including Worldwide Solutions Assessment Partner of the Year, U.S. Azure Cloud Native App Development Partner of the Year, U.S. Retail and Consumer Goods Partner of the Year, Australia Partner of the Year, and Hong Kong Partner of the Year. Insight has also been recognized as one of the best places to work in the U.K., Italy, and Spain. In separate evaluations by Great Place to Work and most recently as the Best Place to Work for Disability Inclusion. Recent awards are in addition to dozens of other recognitions Insight has received this year and highlight the strength of our partner ecosystem, the diverse solutions portfolio we offer and our teammates that deliver terrific outcomes for our clients. In summary, we are making progress towards becoming the leading solutions integrator as is evidenced by the performance indicators mentioned earlier and we are focused on the fastest growing areas of the market and where our clients need the most help. I look forward to discussing our progress as we continue our journey. With that, I will turn the call over to Glynis to share the key details of our financial and operating performance in Q2 and updated outlook for 2023. Glynis?

Thank you, Joyce. As Joyce mentioned, our results for the quarter were below our expectations. At a high level, the hardware net sales decline of 24% year-to-year impacted results in the quarter. Additionally, the normal software acceleration we typically see in late June did not occur. Despite the decline in net revenue, we continue to see year-over-year gross profit growth in software and cloud, as well as Insight core services. We continue to grow in the high growth areas of cloud, data, and AI. We also achieved a record gross margin of 18.4%. In Q2, net revenue was $2.3 billion, a decrease of 14% in U.S. dollar terms and constant currency compared to the prior year. This decrease was driven by a significant decline in devices, partially offset by an increase in networking, storage, cloud, and software. Over the past few quarters, we have communicated our expectation that devices would be down in the first half of 2023. However, the decline in Q2 was larger than we had anticipated. We believe the device market is near the bottom. In the second half of the year, we expect the rate of decline will be lower than in the first half of 2023 and we still expect devices to be down year-to-year in total for 2023. Overall, on a 14% decline in net sales, gross profit declined 1%, reflecting the hardware performance, partially offset by higher cloud and Insight core services growth, as well as the benefit of the profitability and pricing initiatives we began implementing last year. Gross margin was 18.4%, an increase of 240 basis points and reflects the higher mix of cloud, Insight core services, and infrastructure products, which transacted higher gross margins relative to devices. In addition, our profitability and pricing initiatives also contributed to higher hardware and services gross margin. Insight core services gross profit was $72 million, an increase of 7% year-over-year. This performance reflects lower growth in integration and other services related to the decline in devices, but was offset by growth in applications, data, digital enablement, and networking. Cloud gross profit was a record $115 million, an increase of 12% and reflects higher growth in SaaS and infrastructure as a service. Our adjusted EBITDA margin expanded 50 basis points to a record 5.9%. For the second quarter, adjusted diluted earnings per share was $2.56, down 8% in U.S. dollar terms and in constant currency year-to-year. We have been focused on prudent operating expense management, leveraging technology to drive productivity and efficiency in our business, improving cash flow, and preserving capital for critical initiatives. To expand on Joyce's comments, we have accelerated our cost reduction actions in the current quarter while protecting our client experience, and critical internal investments to support future growth. These actions primarily include, headcount reductions, rationalizing backfill positions, accelerating our best-effort strategies, and optimizing our external vendor spend. As we previously discussed, with slower growth in hardware in the quarter, we generated $28 million in cash flow from operations in the second quarter, compared to a use of $158 million in Q2 of 2022. Through the first half of 2023, we have generated $188 million in cash flow from operations, compared to a use of cash of $442 million in the first half of 2022. And to update you on our share repurchase program, in Q2 we repurchased approximately 720,000 shares of our stock for a total cost of $100 million. Through the first half of 2023, we have repurchased over 1.6 million shares of our stock for $217 million. We did not repurchase any shares in the first half of 2022. We currently have approximately $200 million remaining under our current $300 million share repurchase authorization. We intend to repurchase shares to offset the dilutive impact from the warrants associated with the convertible notes as appropriate. We continue to evaluate our options relative to the convertible notes, as well as the impact of the convertible notes on dilution and our share repurchase strategy. Our 2023 share forecast includes the net impact of share repurchases and anticipated dilution throughout 2023. You will find an illustration of the convertible note dynamics in our investor presentation. We exited Q2 with debt of $338 million outstanding under our ABL, compared to $718 million outstanding as of Q2 2022. This reduction in our debt balance is after spending $217 million on share repurchases in the first half of 2023 and is indicative of the strong cash flow in our business. As of the end of Q2, we have approximately $1.5 billion available under our $1.8 billion ABL facility. We have ample capacity to fund our business operations and capital deployment priorities including M&A. Our adjusted return on invested capital or ROIC for the trailing 12 months ended June 30, 2023 was 15.6%. Our presentation shows our trailing 12-month performance through Q2 2023 relative to the metrics that we laid out at our Investor Day in October. We continue to believe that we are on the right track to hit these metrics in 2027. Adjusted EBITDA, margin expansion, cloud gross profit growth, Insight core services gross profit growth, and improvement in free cash flow as a percentage of adjusted net income. As a reminder, 2022 is our baseline for the 2027 CAGR-based metrics. Since our last earnings call, we have seen a further slowdown in our clients’ decision making and an extension of the current economic environment. We now believe that these dynamics will continue throughout 2023. We expect a high single-digit decline in net sales for the year, but we anticipate low to mid-single-digit gross profit growth, driven by continued growth in software, cloud, and Insight core services, as well as our pricing and profitability initiatives as we execute our strategy to become the leading solutions integrator. In addition, we believe our operating expense management will position us well in the second half of 2023 and provide a tailwind going into 2024. As we think about our guidance for the full year of 2023, we expect to deliver gross profit growth in the low-to-mid single-digit range. We expect adjusted diluted earnings per share for the full year of 2023 to be between $9.40 and $9.60, a 4% increase at the midpoint compared to 2022. This outlook assumes interest expense between $46 million and $48 million, an effective tax rate of 26% for the full year, capital expenditures of $45 million to $50 million, and an average share count for the full year of 34.8 million shares. This outlook excludes acquisition-related intangible amortization expense of approximately $32 million, assumes no acquisition-related or severance and restructuring and transformation expenses, and assumes no meaningful change in our debt instruments or the macroeconomic outlook.

Thanks, Glynis. As Glynis noted, we continue to make progress towards our solutions integrator strategy and we have confidence that we are on the right path for several reasons. First, our performance indicators continue to move in the right direction. Cloud gross profit grew by 12%, Insight core services gross profit grew 7%, gross margin expanded by 240 basis points to 18.4%, adjusted EBITDA margin expanded by 50 basis points to 5.9%, and trailing 12-month free cash flow as a percentage of adjusted net income was 224%. Second, digital transformation is here to stay. Generative AI will only accelerate transformation as clients seek to improve workflows and enhance productivity, making the work we do even more important. Third, we have a strong balance sheet and our business delivers strong cash generation. We have the capacity to fund our capital allocation priorities, in particular M&A and stock repurchases. Our portfolio of solutions gives us the resiliency to navigate through this economic cycle and we are prepared to capture growth opportunities when spending patterns improve. In closing, I want to thank our clients for trusting Insight to help them with their transformational journeys, our partners for their continued collaboration and support in delivering innovative solutions to our clients, and our teammates for their commitment to our clients, partners, and each other. This concludes my comments and we will now open the line for your questions.

Thank you, Joyce. Our first question today comes from Matt Sheerin from Stifel. Please go ahead.

Yes. Thank you, and good morning, everyone. Joyce, my first question, just regarding your commentary on the demand environment, which still looks to be challenging. A couple of your peers reported yesterday in both have seen a modest uptick in orders and tone from customers coming out of the June quarter. It sounds like you are actually seeing the opposite where things continue to be challenging. So could you be a little bit more specific about what you are seeing and why you may be different?

Yeah. I mean, so first of all, I mean, that Q2 was more challenging than we expected, but we are pretty pleased that we are making some really good progress against our strategy to become the leading solutions integrator and we see some pretty good gross margin expansion, EBITDA margin expansion despite the revenue decline. Hardware declined 24%, and as you know, cyclicality of hardware is quite significant and so that is actually the reason for our strategy, right? We are trying to change the mix of our business and grow our services as a percentage of our mix and we are also trying to make sure we are growing in the fastest growing areas of the market like cloud, data, and AI. So we do see some more strength going into Q3, both in terms of bookings and also in terms of results so far in Q3. So we also expect the second half to be better than the first half. And as Glynis noted, our guidance assumes that we will grow our EPS by 4%, so at the midpoint. So I would say that we feel the second half will be better than the first half, it’s just not going to be quite as robust as we initially anticipated.

Ok. That’s helpful… The other part from that. Got it. Yeah. And then on the hardware side is that for both client devices and infrastructure products as well?

Well, we are seeing some improvement in infrastructure for sure in Q3. We think we are close to the bottom as Glynis said on devices and so we expect devices to basically be down year-on-year and for the entire year, but we do expect to see that improve in Q4.

Okay. Thank you.

In Q1 to-date, the decline in hardware has been less severe at the beginning of Q3 compared to the first two quarters sequentially.

Thank you, Glynis. For my final question about your cost reduction measures, can you provide a figure for that and how it will reflect in the P&L? Should we expect a decrease in OpEx?

So, Matt, I think, what I can tell you is, you will see it in OpEx. And I guess what you could look at is in the second half of the year OpEx as a percentage of GP will grow at a slower pace of NGP. Growth in OpEx in the second half will be slower than the growth in GP in the second half.

Okay. Great. Very helpful. Thank you.

That’s how we get the expansion in EPS drivers.

Okay. Got it. Okay. All right. Thanks a lot.

The next question on the line is from Joseph Cardoso from JP Morgan. Please go ahead.

Hey. Thanks. Good morning and thanks for the question. My first question here, I just wanted to see if you can give us a peek under the hood at what you are seeing in the services business, particularly wanted to touch on the more moderate year-over-year growth in agent services, as well as the trend you are seeing core services with the sequential recovery in the second quarter, which also came with record gross margins I believe. Can you just touch on the drivers of those two and then how are you thinking about those tracking into the second half of this year?

We saw a 7% growth in our core services business. There are two main components to our core services. The first involves the fast-growing areas of the market, such as cloud, data, and AI, which grew as we anticipated. However, the other segment of our core services, particularly related to devices, like labs and configuration capabilities, experienced a decline. So, it's somewhat mixed results.

And then just on the year-over-year growth in agent services being a bit lower than what you have seen over the past four quarters?

I think that’s related just to the how it plays out with regard to different accelerated that we may get have may be able to take advantage of in one year that are not necessarily available in other years. It’s not anything that we think is structural.

Got it. I would like to ask about the AI opportunity you mentioned, especially concerning the generative AI use cases. How should investors expect this revenue to develop for the company? Specifically, could this become a significant contributor as we move into 2024? Additionally, we often hear from investors about the potential for customers to redirect their spending away from other areas to focus on AI. Are you noticing any of that trend? Thanks for addressing these questions.

We are seeing a tremendous amount of interest from every client regarding generative AI. Clients often begin by seeking guidance on policies, governance, and security measures they should implement, along with how to prepare their data for these applications. This initial curiosity then evolves into discussions about potential use cases and specific opportunities to achieve desired outcomes for clients. Currently, we have considerable opportunities, though most discussions are still in the early stages. We are actively engaging with clients about generative AI. It's important to note that we have extensive experience in AI and data, so this transition is manageable for us. However, I don't anticipate it being a major factor in our business during the second half of the year. I believe it will set the stage for additional momentum in 2024, driven by the high level of interest and the potential for enhancing overall business processes and outcomes. Regarding cannibalization, we have not observed any signs of it thus far. I also want to emphasize that this topic cannot be entirely detached from the broader context of digital transformation; it's simply another avenue to achieve similar outcomes, possibly with greater speed and efficiency.

Got it. Thanks for all the color. Appreciate it.

Yeah.

The next question on the line is from Adam Tindle from Raymond James. Please go ahead.

Okay. Thanks. Good morning. Joyce, so I just wanted to start by asking, if you could maybe provide a little bit of color on linearity in the quarter. As mentioned before, one of your competitor cited a surge in June, and I think, we are trying to figure out what happened with you guys relative to that. I noticed in the comments you talked about not seeing the software surge in the month of June, so maybe that’s describing some of the delta. But if you could maybe just at a high level take us through the cadence of the quarter and if you want to tie in any trends in July that you are seeing to support your back half that would be helpful?

We observed strong performance in May and June, with typical cyclical patterns during the second quarter. June is usually our peak month, but we experienced some decline in hardware sales, and the software performance at the quarter's end was not as strong as usual. Looking ahead to Q3 and the second half of the year, we have had a strong start in software, and our infrastructure remains robust. Our backlog continues to progress, and the decline in enterprise devices has eased compared to the first two quarters, which is a positive indication for the latter half of the year, with expectations for further improvement in Q4. Conversations with our clients and OEM and publisher partners suggest a strong outlook for the second half, particularly Q4, which many expect to be better than Q3. Typically, Q3 is not our strongest quarter, and historically, we see it decline as Q4 tends to rise in the second half.

Got it. Okay. And then on the cost reductions, Joyce, I just wanted to maybe touch on the logic to doing this now. It sounds like the decline in the or the deviation relative to your forecast was largely in the device ecosystem being maybe not as robust as expected, but you are also talking about kind of calling the bottom in that market. So if we had a delta in that device ecosystem, but it’s going to accelerate from here, what went into the decision to implement cost reductions now? And Glynis, I am sorry, if I missed it, did you quantify the amount and timing of those reductions? Thanks.

We didn’t quantify the amount. The timing is in the second half. So our principle that we have is that SG&A should grow at a slower pace than GP growth. That’s the principle that we have. That did not occur in the second quarter. We had been doing prudent, what we would call, prudent expense management throughout this year and the second half of last year with regard to looking at backfills before we fill them, maybe delaying some backfills. And based on what we are seeing for this year, we made decisions around reductions that we needed in order to continue to fund sales and technical talent that we need for the business on a go-forward basis. So hardware is not performing as well, we have some efficiencies that we put in as it relates to how we execute on hardware and we believe that the reductions that we are making now will ensure that in the second half of the year SG&A growth at a slower pace than GP and it sets us up with a tailwind going into 2024.

And the only thing I’d add, Adam, is I mean, we are declining 14% on the topline. That hurts and it’s an opportunity for us to look at the cost structure and set ourselves up so we are a more efficient business, as Glynis said, as we head into 2024.

Okay. Just to clean this up on the device stuff, I think, the exciting part is the calling the bottom here and thinking about back half trends maybe getting better. But at the same time near-term here just in this quarter you had expected better growth than experienced in devices. So I guess maybe a way to try to ask this would be, what would be different about the back half of the year and this kind of calling the bottom forecast relative to what you just experienced in Q2, which missed your forecast? What’s underpinning the confidence to call the bottom at this point? Thanks.

Yes, we want to be clear that we anticipate a decline in devices for the year. We do not expect device growth until possibly the end of Q4, if at all, and that is against easier comparisons for us. We did not foresee the decline in devices we experienced this quarter; we had hoped for slightly better performance. This decline was also influenced by our business mix. As a reminder, we have a substantial enterprise and corporate sector, and our commercial business saw significant declines. While the public sector increased, it is not a large part of our overall business. We believe we understand the reasons for the decline and have observed a less severe drop in devices from Q1 to Q2. We expect this trend to continue into Q3 and are hopeful for a slight stabilization or slight improvement in Q4 regarding devices.

Okay. Thank you very much.

We have a question on the line from Vincent Colicchio from Barrington Research. Please go ahead.

Yeah. Joyce, I am curious with valuations getting a little bit better, may we see you become proactive with some tuck-ins here in this market?

Absolutely. We are very excited to see some normalization of valuations and about the opportunities we've discussed as part of our strategy to build capability in fast-growing areas of the market such as cloud, data, AI, and apps. We are very comfortable with our current balance sheet and believe we have ample capacity to support those acquisitions. We are quite enthusiastic about that.

And any differentiation in what you are seeing on the demand side for enterprises versus small and mid-sized businesses?

There are some slight differences in overall performance between smaller commercial businesses and large enterprise and corporate businesses, with both experiencing a decline in the 15% to 20% range. The public sector, on the other hand, saw an increase. However, our public sector only represents 14% of our business, so it would be beneficial if it were a larger part of that market.

And maybe a qualitative question, your positioning as a solutions integrator, are you seeing that resonate in the past few months, any sense if that’s having an impact?

Yeah, we are hearing our clients and partners mention this term frequently. We're noticing similar discussions from traditional competitors as well. We believe that the idea of delivering outcomes quickly and earning the right to do more is very relevant. Clients appreciate how we combine hardware, software, and services to achieve these outcomes. Additionally, with new technologies like generative AI, we can add even more knowledge and value from a services standpoint to help achieve those outcomes. Overall, we are quite pleased with the positive response we've received regarding our strategy.

Okay. Thank you.

Thanks, Vince.

We have no further questions on the question queue, so will now conclude today’s conference. Thank you everyone for joining. You may now disconnect your lines and enjoy the rest of your day.