Insight Enterprises, Inc., Q4 2018 Earnings Call, Feb 14, 2019

Insight Enterprises, Inc.
NasdaqGS:NSIT
FQ4 2018 Earnings Call Transcripts
Thursday, February 14, 2019 2:00 PM GMT
S&P Global Market Intelligence Estimates
-FQ4 2018- -FQ1 2019- -FY 2018- -FY 2019-
CONSENSUS ACTUAL SURPRISE CONSENSUS CONSENSUS ACTUAL SURPRISE CONSENSUS
EPS
1.12 1.32 17.86 0.89 4.42 4.63 4.75 4.55
Normalized
Revenue
1759.86 1749.05 (0.61 %) 1716.73 7107.43 7080.14 (0.38 %) 7304.53
(mm)
Currency: USD
Consensus as of Feb-12-2019 7:33 AM GMT
- EPS NORMALIZED -
CONSENSUS ACTUAL SURPRISE
FQ1 2018 0.60 0.94 56.67 %
FQ2 2018 1.26 1.45 15.08 %
FQ3 2018 1.00 0.91 (9.00 %)
FQ4 2018 1.12 1.32 17.86 %
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Contents
Table of Contents
Call Participants .................................................................................. 3

Presentation .................................................................................. 4
Question and Answer .................................................................................. 10
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INSIGHT ENTERPRISES, INC. FQ4 2018 EARNINGS CALL | FEB 14, 2019
Call Participants
EXECUTIVES
Glynis A. Bryan
Chief Financial Officer
Kenneth T. Lamneck
President, CEO & Director
ANALYSTS
Adam Tyler Tindle

Raymond James & Associates,
Inc., Research Division
Kara Lyn Anderson

B. Riley FBR, Inc., Research
Division
Matthew John Sheerin

Stifel, Nicolaus & Company,
Incorporated, Research Division
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Presentation
Operator
Greetings, and welcome to the Insight Enterprises Fourth Quarter and Full Year 2018 Earnings Conference
Call. [Operator Instructions] As a reminder, this conference is being recorded. It it's now my pleasure to
introduce your host, Ms. Glynis Bryan, CFO. Thank you, Ms. Bryan. You may begin.
Glynis A. Bryan
Thank you very much. Welcome, everyone, and thank you again for joining the Insight Enterprises
earnings conference call.
Today, we will be discussing the company's operating results for the quarter and full year ended December
31, 2018.
I'm Glynis Bryan, Chief Financial Officer of Insight, and joining me is Ken Lamneck, President and Chief
Executive Officer.
If you do not have a copy of the earnings release 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.
Today's call, including the question-and-answer period, is being webcast live and can be accessed via
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 the associated webcast contain time-sensitive information that is accurate only as
of today, February 14, 2019.
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 refer to non-GAAP financial measures as we discuss the fourth
quarter and full year 2018 financial results. When referring to non-GAAP measures, we will refer to such
measures as adjusted. Non-GAAP measures to be discussed in today's call include adjusted earnings from
operations, adjusted diluted earnings per share, adjusted return on invested capital and adjusted free cash
flow.
You will find a reconciliation of these adjusted measures to our actual GAAP results included in the press
release and the accompanying slide information issued earlier today.
Also, please note that unless highlighted as constant currency, all amounts and growth rates discussed are
in U.S. dollar terms. Additionally, any references to our core business or organic change year-over-year in
our performance will exclude Cardinal Solutions -- will exclude results of Cardinal Solutions subsequent to
the acquisition in August 2018.
Lastly, we adopted ASC 606 effective January 1, 2018, on a modified retrospective basis. As discussed on
previous calls, this means that we have not represented the 2017 results shown in our earnings release or
presentation materials 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 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 report and subsequent filings with the SEC.
With that, I will now turn the call over to Ken. And if you are following along with the slide presentation,
we will begin on Slide 4. Ken?
Kenneth T. Lamneck
Hello, everyone, and thank you for joining us today to discuss our fourth quarter and full year 2018
operating results. I'm pleased to report we delivered another quarter of strong earnings performance in
the fourth quarter. Against a difficult comparison to our strong fourth quarter results last year, our team
executed very well to expand gross margins and grow our bottom line results by double digits.
Specifically for the fourth quarter of 2018, consolidated net sales were $1.7 billion, down just under 2%
year-over-year, including the effect of the adoption of ASC 606, which has resulted in more sales reported
on a net basis for us in 2018 and compared to the tough comparison of 22% year-over-year growth
reported in the fourth quarter of last year.
Consolidated gross profit of $254 million in the fourth quarter was up 9% year-over-year and up 10% in
constant currency. Gross margin expanded 140 basis points year-over-year to 14.5% reflecting a higher
mix of sales of cloud-based and netted software offerings in the core business and higher professional
services sales with the acquisition of Cardinal Solutions, completed in August 1.
Consolidated selling and general administrative expenses were $195 million, up 6% year-over-year and
7% in constant currency, largely due to the acquisition of Cardinal. However, selling and administrative
expenses as a percent of gross profit were down 260 basis points year-over-year.
Adjusted earnings from operations were up 23% year-over-year to $59 million, and adjusted earnings
from operations margin expanded 70 basis points to 3.4% of sales. On a GAAP basis, earnings from
operations were up 29% compared to the same period last year, and adjusted diluted earnings per share
was $1.32, up 63% year-over-year on a GAAP basis. Diluted earnings per share was $1.31.
Moving on to Slide 5. Our fourth quarter results reflect a strong close to another record year for our
company. For the full year 2018, we delivered record top line sales surpassing the $7 billion mark for the
first time. The team is focused on optimizing product mix and expanding our service offerings, drove gross
profit faster than sales at 8% year-over-year and improved gross margin by 30 basis points to 14.0%,
also a new record for the company.
Top line growth and gross margin expansion, combined with continued expense discipline, drove adjusted
earnings from operations up 21% in 2018 compared to the prior year. These results are particularly
impressive when compared to the 24% of adjusted earnings growth delivered in 2017.
Adjusted earnings per share for the full year of 2018 was $4.63. In addition to the third year in a row, our
team delivered another record year. We also delivered significant stronger cash flow results and improved
our adjusted ROIC metrics materially year-over-year.
On slide 6, as we look back in our business for the full year of 2018, we are pleased with all that we
accomplished. We invested in teammate development programs and benefits to ensure we can compete
for and retain strong talent across the business. We have a values-based culture and we know that our
teammates are our #1 asset.
As a result of our 2018 efforts, we were recently recognized as a Fortune Top 100 Best Companies for
Diversity and also ranked #23 on Fortune's Best Workplaces in Technology list.
Our global teams delivered a third consecutive year of double-digit earnings growth with growth delivered
by each of our geographic operating segments.
Next, we accelerated our focus on cash management, enhancing our internal management systems and
discipline around investments and inventory receivables, which drove adjusted free cash flow of $260
million for the full year.
As a result of our strong earnings growth, disciplined cash management practices and lower tax rate, our
return on invested capital metric hit a new high of 16.9%, an increase of more than 300 basis points over
2017. In addition, we continue to improve the efficiency of our client-facing operations, reengineering
key workloads with process automation and optical scanning technologies, while also making significant
investments in our e-commerce and digital marketing platforms.
And our partner ecosystem is stronger than ever. We continue to hold top share positions with our
strategic partners and are actively engaged to provide emerging solution partners access to our talent and
our clients.
Next, we continued our strategic efforts to help our clients evaluate and implement cloud technologies,
which led to gross profit earned from cloud services become an 18% of our consolidated gross profits in
2018, up from 13% last year.
In addition, for the third year in a row, our team earned a position in Gartner's Magic Quadrant for magic
-- for Managed Workplace Services, placing us in the top 21 companies in North America. Not only is
this an indication of the great work that our Connected Workforce team has accomplished already, but it
provides an advantage for bringing our solutions to new clients in 2019 and beyond.
Finally, we acquired Cardinal Solutions on August 1, 2018, and substantially completed the integration of
IT systems and back office operations in late January of 2019. We are pleased with the financial results of
the business in the first 2 quarters as part of Insight, and we're already seeing some early wins for cross-
sell in our combined clients.
I want to take just a moment and thank our valued teammates, loyal clients, dedicated partners across
the globe for delivering a record year for Insight in 2018.
Moving to Slide 7. As we head into 2019, the IT market is healthy and growing. Across the markets where
we do business, industry analysts expect flat to low single-digit growth in hardware sales in 2019 and mid-
single-digit growth in software and services sales. Our plans for 2019 are focused on driving growth in
excess of the market across our operating segments.
In 2019, we will continue to empower our clients to manage our IT environments more efficiently for today
so they can drive meaningful business outcomes and transform their own business for the future. To do
this, we will leverage our 4 solution areas to further enhance our value proposition to clients around the
world, align our offerings to clients' needs and utilize our strategic partner relationships and organize our
resources to target key areas of opportunity in the market.
As a reminder, our 4 solution areas are: one, supply chain optimization, which focuses on driving
operational excellence in order to help our clients optimize costs and improve efficiency; two, Connected
Workforce, which focuses on improving and enabling the workplace to attract and retain talent in addition
to improving overall worker productivity; three, cloud and data center transformation, which helps clients
optimize their data center infrastructure and migrate to a cloud environment to improve speed of business
delivery, increase business agility and enhance security; and lastly, digital innovation, which leverages
innovative applications to improve clients' business performance and uncover new revenue streams for
them.
Each of our solution areas represented discrete area of growth for our business and, when connected
to each other, provides a platform for our clients to leverage our breadth of expertise to solve the most
relevant business challenges from an IT supply chain to optimizing performance in a digital world.
Our strategy in 2019 is to grow market share by expanding in a 4 solution areas with new and existing
clients across our geographic footprint in North America, EMEA and APAC. As part of this model, we can
serve clients directly in each of our markets or serve our clients -- single client globally where they enjoy
common experience across our footprint.
In support of our go-to-market strategy globally, we have a strong operational platform that includes
scalable IT and e-commerce systems and processes, robust digital marketing capabilities and a culture
of continuous business process transformation and automation. In 2019, we'll continue to invest in this
critical area to ensure we can deliver great plan expense while also optimizing our infrastructure to scale
with future growth.
Over the past 5 years, we have made significant progress as a company, transforming our business from
a solution provider to a well-respected global systems integrator with deep expertise across multiple
technology areas our clients value most.
Today, we have a single united global leadership team, integrated and scalable IT systems and operations,
a highly engaged workforce and a clearly defined go-to-market motion around our 4 solution areas.
In 2018, our disciplined execution against our long-term strategy allowed us to accelerate our financial
performance, resulting in another year of record financial results and positions us well to compete
vigorously in the marketplace in 2019 and beyond.
I'll now hand the call over to Glynis.

Glynis A. Bryan
Thank you, Ken. As Ken noted earlier, we are pleased with the progress we made in 2018 delivering strong
top and bottom line results, improving our cash flow generation and making strategic investments in your
business that will help position us to compete in the future.
I'll take a few minutes to summarize the fourth quarter and full year results of our geographic operating
segments and will then cover taxes and cash flow performance.
Moving on to Slide 9, in North America, in the fourth quarter, hardware sales increased 1% year-over-year,
that is compared to a 34% increase in hardware sales in the fourth quarter of last year. Services sales
increased 35%, including higher sales of cloud subscription and warranty offerings and the acquisition
of Cardinal. Software sales decreased due to a higher mix of software sales now reported net and now
included in our services category.
Gross profit in North America was up 7% year-over-year and gross margin improved 120 basis points,
reflecting the increased mix of services sales in the business. In addition, we focused on controlling costs,
which allowed us to grow adjusted earnings from operations 15% year-over-year to $45 million.
Moving on to Slide 10. For the full year, net sales in North America grew 3% year-over-year hardware
and services sales grew 8% and 23%, respectively, which more than offset the decline in software
sales. As I've said previously, more software sales are recorded net in 2018 as a result of ASC 606 and
the continued migration of software licenses to cloud subscriptions. In addition, both of those are now
reported in services sales.
From a profitability perspective, gross margin in North America in 2018 increased 40 basis points year-
over-year, and when compared with tight expense control across the business, adjusted earnings from
operations in North America increased 17% year-over-year, representing the third consecutive year of
double-digit earnings growth by our North America business.
And on Slide 11, in EMEA, net sales in the fourth quarter grew 4% in constant currency, including double-
digit growth with mid-market clients and low-single digit growth in the public sector. Enterprise spending
was down year-over-year, but our team focused on profitability and grew gross profit 16% year-over-year
in constant currency. As a result, gross margin expanded 160 basis points, which drove adjusted earnings
from operations up 40% compared to the same period last year.
On the -- for the full year of 2018, in constant currency, our EMEA business grew net sales by 9%
compared to 2017. Strategically, we focused on growing our share of the hardware market, primarily in
the United Kingdom, and continued to help clients optimize their IT options in the cloud across regions
and this grew gross profit faster than sales at 12% in constant currency and gross margin up 50 basis
points year-over-year. Expenses in EMEA grew slower than sales, and this helped drive the 50% adjusted
earnings from operations growth reported by our EMEA segment for the full year.
Moving on to Slide 15. In APAC, net sales in the fourth quarter decreased 2% in constant currency due to
an increased mix of cloud and software maintenance sales recorded net.
Gross profit grew 40% in constant currency, while gross margins expanded significantly from prior year
due to the increased mix of netted sales and higher product margin. The increase in gross profit was
slightly offset by an 8% increase in operating expenses related to variable compensation, which led to
adjusted earnings from operations growth of 178% compared to the fourth quarter of 2017.
For the full year in 2018 in constant currency, our APAC business grew net sales by 13% compared to
2017, with fine execution across each of our hardware, software and services categories. Strategically,
our team focused on expanding our digital services capability into Sydney and Melbourne, which drove
professional services sales up double digit, but also initial setup cost down to the gross margin in the short
run. However, the team is focused on controlling expenses -- reduced selling and administrative expenses
as a percentage of gross profit by more than 300 basis points year-over-year, and this led to adjusted
earnings from operations growth of 27% compared to 2017.
Before I go to taxes, I want to provide some color about how our strategy is impacting our business mix
and profitability. In 2018, services sales grew greater than 20% year-over-year in each of our operating
segments. As Ken noted, our solution area strategy has refined our focus on modern services and
solutions that best meet our clients' needs. From my viewpoint, this strategy is also important because of
its positive effect on our overall profitability.
In 2018, services net sales were 12% of our consolidated net sales, an increase of 180 basis points year-
over-year, while services gross profit at 46% of our consolidated GP in 2018 was up more than 300 basis
points over 2017. As a result, our services -- as a result of our services growth -- as a result, our services
growth was the main driver of our gross profit -- gross margin expansion year-over-year to a new record
of 14%.
Moving on to our tax rate on Slide 15. Our effective tax rate in 2018 was down 23% -- was 23%, down
from 43% last year due primarily to the U.S. tax reform enacted at the end of 2017.
As we head into 2019, we expect our global effective tax rate will be between 25% to 26% for the full
year. This includes the 21% U.S. federal tax component, fee income taxes, the impact of limitations on the
deductibility of certain expenses among other changes related to the U.S. federal tax reform and also the
effects of [ foreign ] earned income.
Rounding out our cash flow performance on Slide 15, our operations generated $293 million of cash
compared to the use of cash last year of approximately $307 million. Our strong cash flow this year
reflects our enhanced focus on reducing receivable balances, minimizing general clients and specific
[indiscernible] investments and other productivity improvements.
For the full year of 2019, we expect cash flow from operations will be on a normalized annual range
between $160 million and $200 million. In 2018, we invested approximately $17 million in capital
expenditures, down 10% year-over-year, and we used $22 million to repurchase approximately 641,000
shares of the company's common stock.
Cardinal Solutions was acquired in the third quarter of 2018 for approximately $79 million, net of cash
acquired, and including estimated final working capital and tax gross-up adjustments.
For comparison, we used $187 million to acquire Datalink and Caase in 2017. All of this led to a cash
balance of $143 million at the end of the fourth quarter, of which $108 million was from extension of
foreign subsidiaries and we had $197 million of debt outstanding under our financing arrangement.
This compares to $106 million of cash and $330 million of debt outstanding at the end of 2017. Our
cash conversion cycle was 33 days in the fourth quarter of 2018, down 2 days year-over-year. Accounts
receivable and accounts payable increased as a result of the adoption of ASC 606, but had a similar effect
on cost of sales and cost of goods sold and this adversely affected our cash conversion cycle of 2 days.
I will now turn the call back to Ken to review our 2019 outlook.
Kenneth T. Lamneck
Thank you, Glynis.
Moving on to Slide 16. We are pleased with our execution in 2018 and believe our business is healthy
across each of the markets in which we compete. With respect to our full year 2019 outlook, we expect
to deliver sales growth in the mid-single-digit range compared to 2018. We also expect diluted earnings
per share for the full year of 2019 to be between $4.75 and $4.85. This outlook assumes an effective tax
rate of 25% to 26% for the full year 2019. Capital expenditures of $20 million to $25 million for the full
year and average share count for the full year of approximately 36.2 million shares. This outlook does not
reflect the repurchase of any shares that may be made under our current share repurchase program and
assumes no acquisition-related or severance and restructuring expenses.
Thank you again for joining us today. I want to once again thank our teammate across the world for
everything they do for Insight. I'm honored to be part of such a great team.
That concludes my comments. We'll now open your line up for your questions.
Question and Answer

Operator
[Operator Instructions] First question is from Mr. Adam Tindle, Raymond James Financial.
Adam Tyler Tindle
Raymond James & Associates, Inc., Research Division
Ken, I just wanted to start on the 2019 outlook. I know there's a lot of confusion out there in the
investment community. There seems to be a view that tough comparisons, year-over-year, from tax
reform benefit in 2018, a potential slowing hardware cycle, a number of different things that are going to
make growth more difficult. But it seems like at the distributor and the reseller level we're seeing pretty
healthy continuation of solid spending into year-end and outlooks beyond that. So I know you mentioned
the industry analysts expectations for growth in your prepared remarks, but I'm just hoping that you can
maybe talk about this dynamic and then also what you're hearing from both the customer and partner
level on expectations for 2019.
Kenneth T. Lamneck
Thanks, Adam, for that. Yes, I would say, overall, from what we see and, of course, we have visibility, real
visibility probably a few quarters out for our business as far as pipeline and bookings. And I would say that
things definitely look healthy across the 4 solution areas that we represent. So good activity going on, of
course, in the area of desktops, notebooks, sort of the device area. So we continue to see that. Again, as
we said, is this a cycle or is just a continuation. We think it will be a little bit lumpy because of just big sort
of refreshes that we do with large enterprise clients. But, overall, everything we're seeing and hearing is
actually -- continues to be pretty strong. So no pull back from us in that area. Our cloud transformation
business as far as focus on the network server storage activity, we're seeing some really good cross-sell
activity between Insight and traditional sort of Datalink and really starting to take advantage of that.
So we continue to see that go strong. And of course, cloud sales continue to be very, very strong when
you look at the things that we're doing with things like Microsoft Azure, Office 365 and so forth. So we
continue to see the market to be healthy and to be moving on as more and more of our clients, of course,
are looking to, digitally, how do they improve and enhance their business and IT continues to be more of a
solution for them. So we remain pretty consistent with what we've seen in the last few quarters.
Glynis A. Bryan
Adam, can I just maybe translate that in terms of just numerically how that translates into the guidance
that we gave. So we expect that our growth rate is going to be in the low to mid-single-digit range,
overall, including hardware and software services. I will give them the comments that Ken made, so we
anticipate continuing to grow in 2019. We expect that the gross margin is going to be relatively consistent
with where we ended 2018, given all of that. We've seen a little bit more conversion to the cloud, but we
expect it to be relatively consistent. And when you look at our EPS guidance, it's relatively low on a year-
over-year basis, and there are 2 drivers of that. One is interest expense is anticipated to be a little bit
higher, given the higher interest environment that we're in as well as the fact that we had a lower tax rate
in 2018, at 22.9% -- [ 22.7% ] versus the midrange that we're giving you of around 25.5% to 2019, so
that mutes the EPS guidance that we have anticipated. Our EFO -- our operating income would be higher
than that on a year-over-year basis. If you do the math, you will get to about 7% growth there.
Adam Tyler Tindle
Yes, that's really helpful, and I want to touch on the EFO guidance because it seems to suggest kind of
a maybe a modest increase to margins on the EFO line. But you've got revenue growth like you said in
kind of mid-single-digit range, you would expect some leverage. Seems like some of the higher-margin
areas are growing nicely. But I'm just trying to understand why we wouldn't see more increase on the EFO
line. I know Ken mentioned some investments in the prepared remarks, so there's some things that are
offsetting. Just talk about the puts and takes of the EFO margin in 2019 and why it's kind of modest to
flattish?
Glynis A. Bryan
It is modestly up. Modestly flattish, I guess, will be good explanation for that. And part of it is around the
investments that we're continuing to make in the business. We actually had a very strong 2018 on top of
a very strong 2017. And we want to continue the trend, but there are certain events that we're making
as we pivot more towards our solution areas that cover Connected Workforce, data transformation and
digital innovation. Those are going to be the drivers of margin expansion for Insight in the future, and
we're continuing to make investments to ensure that we will drive that further going forward. I just want
to make one other comment. You will remember, Adam, I think we talked about this, that in Q1 of last
year was a very strong Q1 for Insight. It was -- I think we didn't see the normal seasonal dip in Q1 of last
year that we typically see. It was about as strong as December in terms of revenue growth. We anticipate
that revenue growth may be more muted in Q1, but that would still be able to generate EFO and gross
margin expansion.
Adam Tyler Tindle
You beat me to the punch, I was just going to go there. I just had one final clarification because I know
in the previous call you had talked about a large deal in Q1. Can you maybe just update us on that? So I
had been thinking that perhaps, with that large deal, we'd see kind of similar trends to last year where we
don't see that drop-off in revenue sequentially from Q4. But just give as an update on what happened with
the large deal.
Glynis A. Bryan
The large deal is still going to be coming in. It is netted. So the impact -- I guess, when we talked about
it, we didn't really focus on the revenue side of that transaction, but it is a netted deal so the impact on
revenue isn't going to be that great.
Adam Tyler Tindle
Okay. So then...
Glynis A. Bryan
It's not driving higher revenue growth in Q1 of 2019.
Adam Tyler Tindle
So we don't have above kind of normal sequential EFO dollar growth as a result and think of kind of
maybe as not quite as much of an uplift in Q2 as in prior years? I just want to make sure we've got all the
nuances.
Glynis A. Bryan
You're actually correct.
Operator
The next question is from Matt Sheerin, Stifel.

Stifel, Nicolaus & Company, Incorporated, Research Division
Just a couple of questions for me. One, just on your revenue expectations for the year, software versus
hardware. On the software side, are you on an apples-to-apples basis, are we sort of looking at fair
comps here given the 606 transition and also the continued migration towards services model with
customers? So trying to figure out, because last year, obviously, software was down but because some of
that transitioned into services. So I'm trying to figure out how we should think about the actual software
number this year.
Glynis A. Bryan
So on the software number, Matt, the 606 impact goes away because now we're apples-to-apples '19
versus '18 as it relates to the 606 impact, primarily around maturity. The other conversion, that's the
migration to cloud, is still going to continue. That's just the normal trend in the marketplace of on-prem
solutions migrating more towards cloud-based solutions. Those cloud-based solutions are going to be
reported net and just they will be in the services line. So I don't want you to walk away thinking there's no
pressure on the software line going into 2019, but I think we reported that it's going to -- it was a $122
million impact on the software line in 2018 versus 2017. That's not the kind of impact you're going to see
going forward because most of that was really the 606.
That's what I'm trying to figure out because if it is slower, I mean, it seems to me just modeling it that the
software top line would grow slower. But in theory, you should have higher or at least gross profit dollar
growth because of the netted down, which is -- but you're guiding, basically, flat gross margin for the year
so I would've thought that you might still get a boost there just on that mix issue.
Glynis A. Bryan
People get a little bit of a boost associated with gross margins in different quarters. But in the back half of
2018, I think you remember, in our second quarter call, we said that we anticipated revenue growth was
going to be muted in the back half as the mix of our business changed and that we're going to anticipate
that our gross margins would be higher in the back half of the year. So we're coming out of 2018 strong
in terms of gross margins in Q4. And going into Q1 through the rest of the year, we would anticipate
that we'll see some strength in our gross margins, but we don't really know how the percentage of cloud
conversion is going to play out in 2017 -- 2019, so we may be a bit conservative. But we're not going to
see the big benefit from -- that we got in 2018 associated with netting because that 606 differential goes
away as well.
Okay. That's helpful. In the services business, you talked, I think, Ken, you talked about numbers -- a
percentage of your total gross profit dollars. Could you remind me what that was?
Kenneth T. Lamneck
Yes, what we said there, Matt, was the fact that 18% of our gross profit now is coming from cloud-services
type of sales, and that's compared to 13% the year before.
Okay. But what about your total services segment?
Glynis A. Bryan

I think in my comments, Matt, I said about 46% -- 45% of our total GP comes from services. And
that would be the combination of professional services, Insight-delivered service as well as the cloud
component and other netted pieces.
Could you maybe list in order the components of that services because it's such a big percentage of your
gross profit now? So could you remind us?
Glynis A. Bryan
In order?
Yes.
Glynis A. Bryan
I'm not going to list it in order. In terms of you're trying to go which is the largest piece going down,
I don't have that off the top of my head, but we can certainly put it on the website, I guess, and we'll
follow-up with that. But the components that are within our services would be, if you think through,
Microsoft EA, anything that's a fee-based revenue inside that are netted, is going to be a part of that
services number. So there are pieces that are agency fees that will be categorized that way. That
would include software assurance. It would include EACs. It would include cloud transactions. It would
include warranty on hardware. Those are the primary fee-based pieces that are included in that services
component. And then on the "Insight-delivered piece", it would be the standard piece that we have around
our technical services, our professional services, our consulting services. All of our Digital Innovation
group, actually, ends up being a services-driven revenue. So those are the major components that flow
into our services business and we'll -- we can put a schedule on the website that provides that detail and
then you'll see the numbers.
Okay. And, Ken, just...
Glynis A. Bryan
And our K, it will be in our 10-K.
Okay, great. And, Ken, just sort of a larger sort of bigger picture question. NetApp last night, one of your
suppliers, talked about seeing weakness from large enterprise customers in January that were sort of
skittish to pull the trigger on big deals just because of macro issues. I know you don't comment into the
quarter but have you seen any, I mean, talking to customers in terms of how they're thinking about this
year, in terms of optimism or their take on their budgets or IT budgets?
Kenneth T. Lamneck
Yes, we haven't seen that sort of negativity specifically that was pointed out. I did see your report on that.
And I'd say we're seeing pretty much consistency for what we saw in the last 3 or 4 quarters. So there
might be isolated cases where NetApp may have seen that, but I wouldn't comment on that as a general
comment at this stage.
Okay. And just lastly for me, as you look at into the next year or 2 as, in theory, the hardware refresh
cycle for servers and PC is low and perhaps flat to down at some point. You obviously have a strong
software business and a services business, how are you positioning in that kind of environment in terms of
your variable cost, reacting to market swings and that sort of thing?
Kenneth T. Lamneck
Yes. Good question. I think we certainly are very strongly there. We see a lot of things because we're
obviously a cloud and data center transformation business as both private cloud -- public cloud really the
hybrids of the world. And I think one of the things that's been really in my mind underestimated in the
whole hardware world is everything that's going to be occurring with IoT at the edge. I do believe that
it's going to be a really significant driver for hardware solutions at the edge where it's not economical to
do everything up in the public cloud, there are latency issues, so on and so forth. And that's really just
starting to emerge, and we see that a lot in our Digital Innovation group where we're are the heart and
the start of doing these IoT solutions where in many industries that would have never considered an IT
solution that were very analog-based are looking to digital solutions with things like Digital Innovation.
And it's driving and will be driving a lot of legally significant sort of a hardware IoT solutions at the edge.
So that's an area, I think, that again the analysts have underestimated. It's building, we see it on the
frontlines. And I think that will start to become, in the next couple of years, a pretty significant part of
the hardware revenue platform. So if you talk to companies like Dell and Cisco and HPE, they're very,
very excited about what that opportunity is. So we believe that there will be more hardware. It's not all
going to go away. It may not be the same footprint, server and storage that we see today at the edge,
but there'll still be a significant amount of business flowing through there. But again, we're positioned well
because if it goes cloud like we've seen again it go from 30% to 80% a year for us in sort of these cloud
services offerings, we're positioned to take advantage of that as well. And that's good for us as it becomes
more recurring, we like that model quite a bit as we start to build our managed services offering. So we're
bullish on that whole trajectory of where that goes, overall.
Operator
We have a question from Kara Anderson, B. Riley FBR.
Kara Lyn Anderson
B. Riley FBR, Inc., Research Division
Most of my questions have been asked at this point, but I did just want to touch on whether or not you
guys are seeing any impact from the government shutdown or supply shortages that have been, I guess,
called out by some of your competitors.
Kenneth T. Lamneck
We feel that it certainly had a little bit of impact. I wouldn't say it was material for us on the shutdown
because they've come back to work and there being -- they're obviously going to fulfill that. I think the fed
business, overall, was a little bit slow for us and that was mostly mitigated for us by renewals, which we
do think are more cyclical and we'll see those we believe start to occur in the back half of this year. So for
us, we don't think that it's going to have a material impact.
Kara Lyn Anderson
B. Riley FBR, Inc., Research Division
And on the supply issues?
Kenneth T. Lamneck
On the supply issues, I think you're referring, Kara, to the sort of what we see with the Intel chipsets
and those type of things. I think we're going to see it hasn't been material for us, it's certainly being
constraining. But again, I think as you play in the higher end of the enterprise, a lot of these device
manufacturers of course are moving more and more of their production towards the higher end where
margins are better and so forth versus the lower end of the market. So we're seeing it tight, but I wouldn't
say it's a material impact to our business. And the work we have is that's probably going to correct itself
completely in, call it, the end of the second quarter.
Operator
[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. The conference
is concluded. You may disconnect your telephone lines. Thank you.
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Insight Enterprises, Inc., Q4 2018 Earnings Call, Feb 14, 2019

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Insight Enterprises, Inc., Q4 2018 Earnings Call, Feb 14, 2019

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Insight Enterprises, Inc.

CONSENSUS ACTUAL SURPRISE CONSENSUS CONSENSUS ACTUAL SURPRISE CONSENSUS

CONSENSUS ACTUAL SURPRISE

FQ1 2018 0.60 0.94 56.67 %

FQ2 2018 1.26 1.45 15.08 %

FQ3 2018 1.00 0.91 (9.00 %)

FQ4 2018 1.12 1.32 17.86 %

Call Participants .................................................................................. 3

Adam Tyler Tindle

Kara Lyn Anderson

Matthew John Sheerin

I'll now hand the call over to Glynis.

Question and Answer

Matthew John Sheerin

Chief Financial Officer

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