Insight Enterprises - Earnings Call - Q2 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to the Insight Enterprises Second Quarter twenty twenty Operating Results Call. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker today, Ms. Glynis Bryan, Chief Financial Officer.

Please go ahead, ma'am.

Speaker 1

Thank you. Welcome, everyone, and thank you for joining the Insight Enterprises earnings conference call today. Today, we will be discussing the company's operating results for the quarter ended 06/30/2020. I'm Glynis Brine, Chief Financial Officer of Insight, and joining me is Kim Lamnick, 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 eight k, you will find it on our website at insight.com under 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 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, 08/06/2020. This call is a property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the expression consent of Insight Enterprises is strictly prohibited.

In today's conference call, we will refer to certain non GAAP financial measures as we discuss the second quarter twenty twenty financial results. When referring to non GAAP measures in today's call, we will refer to adjusted earnings from operations, adjusted diluted earnings per share and return on invested capital. You will find a reconciliation of these non GAAP measures to our actual GAAP results included in 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 are discussed in U. S.

Dollar terms. 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 annual report on Form 10 ks and periodic reports subsequently filed with the SEC. With that, I will now turn the call over to Ken.

And if you're following along on today's presentation, we will begin on Slide four. Ken?

Speaker 2

Hello, everyone, and thank you for joining us today to discuss our second quarter twenty twenty operating results. I'm pleased to report that through our dedicated team, resilient business model and the PCM acquisition, we delivered double digit adjusted earnings growth year over year in the second quarter. Given the challenging demand environment in the second quarter, our operating priorities for the quarter were clear. First, we tightened the health and safety standards in our warehouse and mobilized most of our teammates to work from home, which allowed us to continue to support our clients' most pressing IT needs. Second, we focused on reducing our cost to align with the current demand environment, reducing operating expenses by $26,000,000 sequentially.

Third, we focused on cash flow generation, delivering very strong cash flow from operations in the quarter. And finally, we focused on optimizing our earnings results in this tough climate. Now turning to second quarter results on Slide five. Consolidated net sales in the second quarter were $1,970,000,000 up 7% year over year due to the acquisition of PCM. We focused on growing our services and solutions business mix, which helped drive gross margins up 150 basis points year over year to 16.5% in the second quarter, a new record for our company.

And adjusted diluted earnings per share was $1.75 up 11% year over year. On a GAAP basis, diluted earnings per share was a dollar 32. Within these results, gross profit generated from cloud solutions increased to 19% of our consolidated gross profit over the past twelve months, now a meaningful component of our profitability. And given our strong execution, bringing cloud and digital solutions to clients, we are proud to announce that Microsoft named Insight their twenty twenty US partner of the year as well as their worldwide Customer Experience Partner of the Year. Moving to Slide six.

During the second quarter, we maintained our focus on integrating the PCM business, and I'm pleased to report that we've effectively completed the onboarding of all PCM clients to our Insight systems. Over the past year, we have migrated clients off nine ERP systems at PCM, sunset 16 of PCM's different websites, and have consolidated nine of their go to market brands into our one Insight. Earlier this year, we aligned the PCM team to our North American EMEA go to market structure. Now with accounts and common platforms and to our new organizational structure in place, we believe we are well positioned to compete as a single brand in the marketplace. In addition, we continue to expect to exit the year with approximately 50,000,000 to $55,000,000 in annualized run rate cost savings ahead of our first year expectations on the previously disclosed total commitment of $70,000,000 over two years.

On to slide seven. Over the past five years, we have invested in our digital marketing platforms and capabilities. Our ability to lead our clients to the right technology choices through digital engagement, internal research, and published content is important to our strategy to attract and win new clients. In the past year, it has also earned us notable recognition from partners, including Global Customer Experience Partner of the Year awards for both Microsoft and Cisco. As we have grown our digital marketing capabilities into a powerful resource, including the reimagining of insight.com last year, we more effectively meet organizations where they're at on their buying journeys.

With timely thought leadership through resources like our 2020 insight intelligence technology pulse report, measuring the impact of COVID nineteen on enterprise business readiness, and a quarterly tech journal, we're giving clients fresh perspectives on things like supplier consolidation and managing hybrid workforces at times when they have more questions than ever about how to move forward. Insight.com is serving as a crucial starting point for clients' research. Overall traffic to our site grew a 128%, and live chats with virtual agents grew 550% year over year last quarter. The modernization of our online experience ultimately earned insight gold status in the web presence category, the 2020 Association of National Advertisers b two b awards, as well as an Oracle Marquee Award for best demonstrated ROI in service. In the new normal now, post COVID, Incyte's thought leadership coupled with our investments in digital marketing over the past five years position us well to continue to creatively reach and grow strong relationships with our clients.

On Slide eight. Heading into the third quarter, some markets in Europe and Asia are open for business, while most major cities in North America are partially open and many businesses still in a work from home mode for most of their teammates. As a result, we expect demand trends to continue to be down in q three. In July, hardware bookings are down year over year and more than 10% in North America business as clients extend the use of light for their assets in this uncertain environment. Software sales, mostly software as a service delivered in the cloud and reported in our service category, have proven more resilient and are expected to perform better than hardware sales in the third quarter.

We do not have visibility to how the global economy and overall IT demand respond over the coming quarters. With this high degree of uncertainty, we're not going to provide specific EPS guidance for the third quarter or for the second half of the year. To assist with your modeling, however, we currently expect net sales to be in the third quarter compared to last year due to the addition of PCM of an additional month in the quarter. On a consolidated basis, we currently expect gross margin in the business to be between fourteen point seven and fourteen point nine, up year over year due to the addition of PCM and a higher mix of cloud and services sales. Finally, we will continue to focus on controlling our costs to align with the demand environment and currently expect SG and A as a percent of sales will approximate levels reported in the second quarter.

There remains significant uncertainty around the ongoing impact of COVID-nineteen on the economy and potential resurgence of cases in the back half of the year. Based on what we know right now, we would expect the fourth quarter results to follow historical trend historical top line trends of low single digit growth compared to the third quarter. We're pleased to see each of our segments rise to the operating and demand challenges presented by COVID-nineteen in the 2020. I want to thank our teammates across the globe for their commitment to insight in our clients. As we head into the 2020, we have a resilient team, a strong balance sheet and access to sufficient levels of capital to meet our foreseeable operating requirements during these challenging times.

And we're confident that our solution area expertise will allow us to support our clients' needs, both in this environment and with the economy eventually rebound. I will now hand the call back over to Glenn to provide more detail on our financial performance.

Speaker 1

Thank you, Ken. I'd also like to thank our global teammates for their dedication and resilience during these last several months. I'm gonna start on Slide 10. Last quarter, we identified key initiatives to help protect our profitability during these uncertain economic times. As Ken noted, we decreased our operating expenses by $26,000,000 in the second quarter compared to 2020.

About half came from lower salaries, the majority of which was due to fewer headcount from planned integration actions and the rightsizing of certain support functions for current demand trends. The balance of the decrease splits very evenly between lower travel and other discretionary expenses and lower variable compensation and lower budget attainment in the first half of the year. As we move on to slide 11, in addition to the cost savings initiatives and the enhanced credit review procedures, we made debt reduction of priority fees with available cash. In the second quarter, we generated strong cash flow and reduced debt by $350,000,000 ending the quarter with approximately $435,000,000 of debt outstanding under our revolving ABL facility and our convertible notes. At the end of the quarter, we had a $164,000,000 in cash on hand.

We also ended the second quarter with eligible accounts receivable to support access to the maximum availability under our $1,200,000,000 ABL facility. Exiting the quarter, we are comfortable with our current leverage position of less than 1.5 times debt to cash flows or EBITDA. Under our ABL agreement, our primary compliance covenant is a fixed charge coverage ratio, which includes trailing twelve month EBITDA over capital expenditures, taxes, and interest expense. As of June 30, we were at four times against the minimum requirement of one time and are very confident that we can support our capital requirements and liquidity needs. As we highlighted last quarter, our cash cycle inverted, meaning we pay our partners on terms shorter than we received from our clients, which allows us to drive more cash flow and sales decline.

We saw this dynamic in the second quarter, which helped drive the record cash flow generation of $4.00 $4,000,000 in the quarter. In this working capital dynamic, we also benefited from more than $2,000,000 in cash flow items related to timing differences between quarters. For the full year, we expect cash flow generation will be in the range of $240,000,000 to $280,000,000 comfortably exceeding the top end of our previously announced annual guidance range of $180,000,000 to $200,000,000 Moving on to Slide 12, we'll review our operating segment results. Starting with North America, net sales were $1,500,000,000 in the second quarter, up 10% from the prior year quarter. Year over year, hardware sales increased 9%, software sales were down 1%, and services sales increased 27%.

Net sales growth was driven by the PCM acquisition. Since the closing of the acquisition, the PCM book of business has been mostly integrated into Insect Systems. As a result, we no longer report results for the acquired PCM business on a stand alone basis. Gross profit of $245,000,000 in North America was up 23% year over year, and gross margins improved a 170 basis points to 15.9%, primarily due to increased mix of cloud and services sales of the business, the addition of PCM, and higher vendor funding realized in the quarter. North American selling and administrative expenses, excluding amortization expense, increased 26% year over year, primarily due to the PCM acquisition.

Adjusted earnings from operations increased 15% year over year to $67,000,000 for the quarter. And as Ken suggested, we are still on target to realize between 40,000,000 to $45,000,000 in PCM cost synergies in 2020, and we expect to exit the year with annualized run rate cost savings between $50,000,000 to $55,000,000 against our two year commitment of $70,000,000 Moving on to EMEA on Slide 13. In EMEA, net sales in the second quarter grew 6% in constant currency to $392,000,000. A 7% increase in hardware sales and a 13% increase in services sales were partially offset by a 2% decrease in software sales as clients chose cloud solutions over on prem software. The increase in hardware net sales was due primarily to higher volume of services of sales, sorry, to public sector of device sales to public sector clients.

The increase in services net sales was due to higher sales of cloud solutions, increased software referral fees and higher volume of sales of Insight delivered services. Gross profit in EMEA in the second quarter was $68,000,000 up 8% year over year in constant currency, and adjusted earnings from operations was $21,000,000, up 26% from the same period last year, also in constant currency. In this disruptive economic environment, we're very pleased to see our EMEA business deliver these record level financial results. Moving on to APAC on Slide 14. In APAC, net sales in the second quarter declined 23% in constant currency to $38,000,000 reflecting lower volume of public sector and enterprise clients.

Gross profit was flat year over year in constant currency, while gross margin expanded from the prior year quarter due to an increased mix of cloud and services sales in the quarter. Adjusted earnings from operations decreased 4% in constant currency year over year. Our effective tax rate for the 2020 was 26.2%, which was in line with prior prior year quarter of 25.9%. A little bit more detail on our cash flow performance Year to date through the 2020, our operations generated $498,000,000 of cash compared to a $183,000,000 last year.

In the 2020, we invested approximately $14,000,000 in capital expenditures, up from $11,000,000 last year. We have decided to defer the build out of our new corporate headquarters until early next year as we focus on optimizing our execution in this unusual environment. As a result, we now expect CapEx for the full year to be between $20,000,000 to $25,000,000 As an update, we have six of our buildings held for sale as of June 30. We're continuing to actively market these facilities, but in these times, the timing of the sale remains uncertain. We've also invested $6,000,000 to acquire V NEXT in France in February, and we received $14,000,000 in net proceeds from the sale of one of our buildings.

Lastly, we used 25,000,000 to repurchase our common stock in the first quarter. All of this activity led to a cash balance of $154,000,000 at the end of the second quarter, of which $120,000,000 was resident from our foreign subsidiaries. And as I noted earlier, approximately $435,000,000 of debt was outstanding under a revolving credit facility and a and convertible notes. Note, this compares to a $112,000,000 of cash and $45,000,000 of debt outstanding at the end of the 2019. As a reminder, we've taken several actions and are reviewing additional opportunities to help preserve our profitability during the downturn while positioning our business to emerge healthy and competitive as market conditions improve.

Specifically, on the cost side, we have reduced discretionary spending across the business. We're allowing natural employee attrition to flow through, and we're assessing replacement hiring in the context of current demand. We've rightsized our operational and delivery platforms to expected volume expected volume trends, and we've accelerated our existing PCM integration plans around back office sales and services, and that that will allow us to meet our revised synergy goals for this year. At the same time, we make we make we plan to make flex strategic investments in sales and technical resources across our solution areas to ensure we optimize our participation as market conditions improve. And finally, we will reduce judicious about our use of cash, deferring discretionary capital investments and using available cash to pay down debt as our priority.

Our balance sheet is healthy, and we have access to capital to operate in these uncertain economic times. We believe all these steps will help us emerge strong to compete as the economy recovers. I'll now turn the call back to Ken for his closing comments.

Speaker 2

Thank you, Glennis. Slide 16. We remain committed to our long term priorities discussed at our Analyst Day last fall, which include continuing to innovate in order to capture share in high growth areas such as cloud and the intelligent edge, developing and delivering solutions to drive better business outcomes for our clients, expanding the scale in our business and strategic clients and end markets, and lastly, continue to optimize client experience and our execution through relentless focus on operational excellence. For the remainder of 2020, we believe the overall IT market will be challenged given the current COVID crisis and its adverse impact on the global economy. We've taken the appropriate steps to reduce our discretionary spending, ensure we have access to capital to support our short term operating plans and are confident we will weather this tough environment economic environment emerge healthy on the other side.

Thank you again for joining us today, and thank you for all of our teammates across the globe for their support of our company, our partners, and our clients. Be safe, and we look forward to talking with you again later in the fall. That concludes my comments, and we'll now open up your line for questions.

Speaker 0

And your first question comes from Adam Tindle with Raymond James.

Speaker 1

Okay. Before you ask your question, can I just make one correction? When I was talking about cash flow and I talked about the activity that was timing differences in the quarter, I said 2,000,000. That should have been 200,000,000, just to be clear.

Speaker 3

I I think I I was able to to back into that, but appreciate the help.

Speaker 1

But just to clarify for everybody listening in, but go ahead with your question now. Thank you.

Speaker 3

So I'm gonna start with, Ken. In the press release, you talked about a pronounced impact in Q2 compared to internal budgets. And when I hear that I would usually expect to see a disruption in operations and cash flow, but operating margin was up year over year, and Glynis just covered how cash flow was very strong. So I guess the question would be maybe color on the internal budget and the biggest areas of variance and why we did see that show up in operating metric issues this quarter?

Speaker 1

So internally, we had a far higher growth not a far higher, but we had a higher growth expectation around the combination of Insight and PCM in our business. That's really the the biggest driver in terms of He was aggressive targets. There were we had aggressive targets around the acquisition, and we given this environment, we grew, but we didn't grow as much as our internal budgets would have predicated.

Speaker 3

Okay. But but you were able to it

Speaker 2

it seemed

Speaker 3

yeah. But it seems like you were able to to manage some costs in the operational Yes.

Speaker 1

Expense to avoid negative work. Yes. So we've been very aggressive about managing the operational costs. And then in the quarter, we had some help, certainly, from PCM on the gross margin line, but it's also the decline in hardware relative to the increase in services and the mix of the services business with cloud that's driving the gross margin improvement across all the deals. Understood.

Speaker 3

Okay. Thanks. Ken, I just wanted to ask you, it was helpful when you talked about the July trend line for North American hardware declines at down 10%. Could you maybe just give us some context to compare that to either like May or June to give us a sense of cadence of that? How does that compare to what you've been experiencing?

And secondly, when you look at your forward indicators, your backlog, does that down 10% year over year in July start to improve in August and September?

Speaker 2

Yeah. As you may recall, in our last earnings call, we talked about actually that the what we're seeing trajectory wise was actually a 20% sort of bookings decline going into the quarter. So certainly that is an improvement. We're seeing, you know, down 10%. Still down, but certainly an improvement from what we what we saw, and which did play out certainly across the board for the quarter we just announced.

So so yes, I think you could say, you could extract from that, but the trend line certainly seems to be improving in regards to the negativity of the booking trends. To your other question in regards to that, it's it's hard for us to predict, you know, August, September, what that's gonna look like. But what we saw from the trends just in July, of course, that was that was what we experienced.

Speaker 3

Okay. And I guess bigger picture, do you just you know, you talked about kinda suppressed IT spending through the remainder of the year. As you're talking to customers and your sales team's talking to customers, do you get a sense of IT budgets on a go forward basis? It seems like you'll obviously have a pause and a freeze right now as customers are normalizing and reevaluating. Because what do you think happens to budgets and IT spending?

Is there a case that, you know, we're gonna have a longer period of pressure, or do you think we're gonna have a surge in projects returning and go back to a 2% trend line? I know it's a hard question. Just, any kind of color what you're getting from Salesforce and customers.

Speaker 2

Yeah. I would say that, you know, certainly a lot of it as as obviously, you know, is is dependent upon the the COVID nineteen. And when people start to come back to offices, I think that will certainly have an impact on the actual spending of certainly the infrastructure side of it. As I think, you know, certainly clients are are sweating those assets probably longer than they normally would. But as they start coming back to offices, I think that will certainly start to open up, and that will start to start to improve.

The device side, I think, continues to continue to be pretty strong. Certainly, the second half will see a pretty robust increase in Chrome Chromebooks as education. And it starts to certainly realize distance learning becomes much more than norm going forward. So I think, you know, there's certainly a huge increase in Chrome products being sold into the k three twelve market. I think that's gonna certainly bolster in the second half the sort of the device spending category for that point of view.

But I think from the infrastructure side, that's probably gonna be pretty much the same for the second half of the year. And then, of course, as we indicated, software is certainly much more resilient. Cloud, which again is 19% of our TP, much more resilient, you know, than certainly what we're seeing in hardware.

Speaker 3

Okay. That's helpful. Thank you very much.

Speaker 0

And your next question comes from the line of Matt Sharon with Stifel.

Speaker 4

Yes. Thanks. Good morning. I just wanted to ask about the strong gross margin in quarter and your guide for it to be down roughly 150 basis points sequentially. I imagine that's a mix issue, but you also talked, Ken, about continued weakness in in infrastructure hardware and and and and other, you know, hardware products.

So you would think that that mix would continue to favor, favor you. So could you talk about that, that dynamic?

Speaker 2

Yeah. I think on the on the gross margin front, gonna let this chime in as well. I think, certainly, Matt, the it is it is the next issue. Certainly, it's a very second quarter. It's our largest quarter.

It's Microsoft's year end, so there's a a big acceleration that occurs in there. And, of course, a lot of that comes in as netted. So that certainly has a a big impact than always historically has had a bigger impact than our gross margin for the second quarter. And the comment around hardware, yeah, there's no question that certainly software carries a higher gross margin for us overall in services than hardware does. On the infrastructure side, a lot of that, of course, will tend to be, you know, a pretty decent gross margin overall.

The devices tend to be certainly much more competitive in that regard. Because in the in the infrastructure side, you do get the ability, of course, to get deal registration on a lot of the projects and so forth, which carry a pretty good gross margin, but devices certainly doesn't carry that same gross margin level. Pokruma, I'll let you add as well.

Speaker 1

Yeah. I think historically, Matt, we've all we've seen usually about a hundred hundred basis point decline in gross margin between q two to q three. Q two is our largest quarter. In this q two in particular, it was our margin was helped by the fact that there was a lower percentage of hardware in our gross margin and a higher percentage of services and specifically cloud related services that are a 100% margin that drove that higher gross profit. We're anticipating that hardware is gonna be a bigger component of our overall gross profit in q three relative to the 10% decline versus the 20% that we had talked about at the beginning of q two.

So that will have a bigger impact on overall gross margin in q three relative to what we saw in q two.

Speaker 4

Okay. Thank you. That's helpful. And and, Ken, just on the the cloud revenue, the the SaaS products that you're selling, Could you be more specific about, you know, where clients are investing, and you see those trends continuing through the out the end of the year?

Speaker 2

Yeah. I think certainly in the COVID crisis, when everybody was certainly going from home, the clients took the perspective of how do they, you know, get their organization in a very secure way, you know, up and running in a in a remote fashion. So the cloud became a very good solution when you looked at, you know, VDI and so forth providing the necessary security. It was very simple, easy to use, and easy to get running. So I think you saw a tremendous impact there, certainly.

So that certainly has shown a pretty robust increase from that perspective. Another is a portion of you know, it's it's easier for them to get up and running to go to the public cloud. And it's, you know, it's it's a situation where they're trying to look at their cost structures well and rather have it sort of a, you know, as an operational expense versus a capital expense at this stage where there's so much uncertainty. So I think that's continuing. And, of course, you know, from a cloud point of view, we're all just seeing the traumatic increase in tools such as Microsoft Teams and Cisco Webex and so forth, which, of course, drive a significant cloud consumption as well, you know, for all of our clients.

So so I think that's gonna certainly play out and continue, and and certainly, you know, lot of that will be sort of permanent, you know, structures in place for clients as well. I think if they start looking, we know some clients that have looked towards VDI realize that that might be more temporary to do that in a public cloud setting as it is it is quite expensive. So I think clients will start relooking at that as they start to come back more into an office setting.

Speaker 4

Yeah. And relative to that, are you seeing, issues with customers basically, you know, not being on premise? So some of those those integration projects that you do, particularly the data link business that you have, are you seeing And and as companies open up again, you think some of those projects will will be reinstated? Exactly.

That's exactly what we we expect to happen. I mean, there's still you

Speaker 2

know, there's certainly certain key projects still going on, but as we know, as we experienced in prior downturns and going back to 2000 and 02/2008, 02/2009, there's usually a robust increase here once we do come out of this where you can't delay those projects forever. You know, you don't you can only put them on hold and pause. So we do believe that there will be a significant resurgence there once the market does turn around, and clients do have to put those projects in a much more active category.

Speaker 4

Okay. And my last question for Glynis relative to the balance sheet. Your cash position was up. You've taken down some debt. Could you tell us about the strategy in terms of what you expect the debt reduction to be for this year and also interest expense estimate for q three?

Speaker 1

I think that what what I would say is that we talked about the $200,000,000 timing difference. Some of that most of that comes back in q three, so you should anticipate that that'll be an increase in our debt usage in q three. When you look through our back end cash flows, generally, we use cash in q three, and we generate a little cash in q four such that we're relatively flat from where we are at the end of q two. And that should help you as you think through what debt would be at the end of the year and hence the associated interest expense. Just as a reminder, our convert has a cash coupon of point seven five basis points, up 75 basis points, and our revolver debt is at a 125% over LIBOR.

Sorry, our ABL debt is at 100125% over 25 basis points over LIBOR.

Speaker 4

Okay. Okay, great. Thank you.

Speaker 0

And your next question comes from the line of Pat Chong with JPMorgan.

Speaker 5

Hi, it's Paul Costa here. Can you hear

Speaker 1

me? Yes.

Speaker 5

Hi, Ken and Glen. Thanks for taking the question. I am well, let me start with the free cash flow. It sounds like you're looking for an increase in the free cash flow for the full year, the $200,000,000 having worked through the system. That's in excess of what you previously were forecasting and it sounds like you're going to use it to pay down maybe some more debt.

Speaker 6

And I don't think anyone's going to complain about that, except I will, because why not buy back some shares? I mean,

Speaker 5

the stock looks really inexpensive at the moment. Why not use some of that excess to focus on equity ahead of debt?

Speaker 1

We agree with you that the stock looks cheap right now.

Speaker 6

So I I think that, you

Speaker 1

know, until we feel a little bit more certainty about where where what's happening in the environment and the economic environment and when the recovery is actually gonna occur, I think we're just being prudent and conservative with regard to our use of cash. There are other opportunities in the marketplace that we'd wanna take advantage of if if it if it if they came to fruition. So I think we just want to make sure that we are as best positioned as possible to take advantage of that. We do have $25,000,000 still outstanding under our authorization from the board for share repurchase. But as of right now, we don't have a plan to implement that.

Speaker 6

Okay. Well, I think you know my opinion. The other thing, Ken, I

Speaker 5

was really fascinated by your the success you're having in going to market through the Internet, through in a digital way. And it feels to me like you're developing a competitive advantage here, certainly relative to the the very fragmented sort of smaller IT VAR market, but maybe even relative to some of the bigger players out there. Can you talk to us a little bit about that? And what do you think that might mean in terms of operating margins over the longer term?

Speaker 2

Yeah. Thanks, Paul, for, the question there. Yeah. We've been investing, as we indicated, for the last, you know, pretty much five years on building out that platform. And it's an extensive array of, of IT systems and SaaS solutions that come together to really deliver that that experience.

So we view this certainly as a differentiator because there's only a few of us in our space that could really have the wherewithal and the economics to really drive that kind of a platform. So we started to view that certainly to be a long term competitive advantage. But smaller players would be challenged to make those kind of investments longer term. And as we know, as clients look to obtain more and more information, we know that most clients now are going to the, you know, the Internet for their source of information before they go to a sales rep. So it's it's it's critical for us to make sure we're part of that conversation, that dialogue, in order to obtain that connection to our clients.

So that's been the journey that we've been on, and we're seeing, you know, significant results from that. When we look at our our lead flow and our ability to really cater our clients' needs and really understand them and to nurture them along their buying journey, has become a significant advantage and one that certainly our partners recognize, and that's pretty heavily with us on going forward. So hard to exactly quantify it, but I think we'd all agree that that's really a key part of the future. That it's sort of that companion for sales is they've gotta have a strong digital marketing capability for the sales organization long term, or, you know, you're not gonna have the same relevancy because, you know, the phone being an important tool is very much a little bit outdated in regards to trying to obtain that first connection to clients. As we all know, none of us answer our phones today.

So very, very difficult. Still an important way to communicate, but it's certainly not what it was five, ten years ago.

Speaker 5

Got you. And if I can sneak in one last question. The cloud, you're having some success with sort of a two part question. First, how much of Microsoft? And the other part of the question is, in the past, we've seen some companies sort of struggle with that transition to cloud because of the netting out of the revenues.

The revenue line doesn't look so good, but margins look great. It doesn't seem to be impacting you at the aggregate level. I'm just wondering if you can comment on those two REPRESENTATIVE:] questions.

Speaker 6

So you're right. It's netted,

Speaker 1

and it does actually produce higher gross margin. I would say that how it has impacted us is that if you looked at kind of customer generated revenue, you would see growth in software in many quarters where we report no growth, flat or slightly negative growth on a net basis. And that is the impact of more business moving from on prem to off prem. We saw that in q two, and it impacted overall software growth for us at the top line, but it helps us ultimately at the gross margin line in terms of the 16.5% gross margin that we reported. So if it's we have a because we have a complement of hardware and services, maybe we don't see the reduction in our revenue that much, but we internally look at that gross versus net around software, want to track the conversion to the crowd the cloud and what business that's generating, but also so that we

Speaker 2

can

Speaker 1

understand the productivity of our sales force in terms of how they're selling to the end client. But that trend is something that we expect will continue because over the course of the next decade, I don't know how long it will take, most of that on prem software is going to convert some kind of cloud subscription based solution.

Speaker 2

And what that becomes important to us, call it longer term, is the managed services that that would drive, which, of course, is a recurring, you know, revenue stream for us, and that's where we're most focused on that. Because I think the cloud, you know, consumptions will will become competitive going forward, and the real key for us will be how we attach ourselves, provide providing this managed service capability to our clients globally. So that's there that we're investing in and continue to build out.

Speaker 1

And a recurring revenue stream that we'd like to capture. Right.

Speaker 5

And Microsoft?

Speaker 1

Well, in Microsoft, you know, if you think about what Microsoft's percentage of the total software total software publisher ecosystem, I would say it's comparable in terms of our composition, the composition of our portfolio. We clearly do other other vendors as well as not just Microsoft, but they're the behemoth in the industry, so they're the behemoth in our in our cloud results as well.

Speaker 5

K. Gotcha. Thanks.

Speaker 1

I don't have a specific percentage for you. And

Speaker 0

your next question comes from Mark Weisenberger with B. Riley.

Speaker 7

Thank you. Good morning. In the current environment, can you talk about opportunities to expand wallet share with your customers and which opportunities may be more durable relative to others and then the potential impact on the panel?

Speaker 2

Yeah. I think it's certainly been an area, Mark, of of always focused for us, of course, is how do we obtain more of our clients' business through, and that's why we really went to our four solution areas, because we believe our clients all buy these four solutions, supply chain optimization, connected workforce, which is about the modern work workplace experience, cloud and data center transformation, and digital innovation. So the ability to sell all of our clients through SMB all the way through public sector, we're all buying in those areas. So having the levels of expertise becomes critical. As we all know, the fastest way to expand is to sell more to your current clients at.

So that's an area that we continue to be, you know, very, very focused on delivering, certainly more value to our clients.

Speaker 7

Understood. Also, with budgets across all organizations being stretched as well as the duration of work learned from home kinda continually evolving, has the current situation provided any impetus or opportunity to accelerate the device as a service offering?

Speaker 2

Yeah. And I would say it it it certainly has. And our that's all in our, what we call, connected workforce. So we we sort of start with that endgame, the same way we can provide device and service. So we find depends on where we have to meet the client where they're at because a lot of clients aren't completely ready for their environment to do that.

But what we'll do is we say we think that's the ultimate endgame for you, but we can help you along this journey. But for some large clients, it may take them actually a couple of years before they can actually get there due to their internal work that's in their structure. But we we actually map out for them what it would take, and then we'll meet them where they're at and and actually migrate them towards that end game towards that. The other part of your question was, I think, around what what areas of technology are you seeing very resilient sort of in this environment? Certainly, you know, there's a few that are very, very key.

At the top of the list, of course,

Speaker 7

is

Speaker 2

security. The cyber attacks continue, as we know, at an accelerated basis. So we see, you know, we see all clients, no matter how distressed their environments are, continue to invest in security. So that's certainly one of the top areas that we're focused on as well. Collaborative environments, of course, as we all know, we discussed with things like Teams and Webex and so forth are critical for clients.

More devices, more robust devices for their their teammates to work from home is certainly becoming very, very key. Things like in the networking space, SD WAN is getting lots and lots of attention for clients. It's a very, very cost effective solution for them to network their devices together. So those are those are certainly some of the key areas. And, of course, as we talked about, you know, everything's cloud is accelerating dramatically.

You'd see the growth rates at, you know, plus 45% for the likes of, you know, Google and Amazon and and Azure. So that's certainly very, very substantial growth rates that we're certainly participating in. Those would be certainly some of the, you know, the the highlighted areas that we're we're focused on because our clients are so so focused in those areas.

Speaker 7

Understood. And and then just two more from me. Can you talk about the reception in the market you're seeing to the the connected platform for detection and prevention and and maybe what the margin profile for those types of engagements looks like?

Speaker 2

Yeah. Good question. And, Marcin, just to make sure we're in a sense. The connected platform is is basically Insights IP where we we provide basically a single pane of glass, and this is all around IoT. So we take the ability to take all this tremendous amount of data and turn that into very useful information for our clients through this connected platform.

And it it basically takes these devices at the edge. In this case, around COVID, of course, it's around thermal imaging, which obviously helps with all the temperature testing, and then does optical cameras to do basically social test for social distancing, test for people wearing masks. It can actually do contact tracing as well. So all those pieces. So, yeah, we've got quite a few clients very interested.

We're obviously using that in our facilities In our our major facilities, we use we use that technology that we've developed. And we certainly have quite a few clients right now very actively looking at that. Some very, you know, large theme park type companies are looking at how they bring back, you know, the public to their to their environment and so forth. So there's a lot of really strong interest in that area, and certainly we've had some good success in delivering that solution. And the key is it's really just around IoT.

And in this case, COVID just happens to be one of the solutions to that, but it's it's a robust platform that works in works in all IoT environments. We've we've deployed it in a lot of major restaurants. We're worried about food safety and how they actually can, measure their ovens and their refrigeration units and provide all the sensing information they need there to operating rooms that are concerned about bacteria and how do they measure precisely temperature and humidity. So the connected platform is a very broad platform that actually helps in the IoT world. And as we keep talking, you know, the biggest cloud that's on the horizon is the intelligent edge, and that is all about IoT.

So that's an area that we think has a very, very promising future and one that we're certainly very heavily invested in. So that's a long, long, winded answer to your question. But, yeah, lots of good interest in the connected platform and certainly the around the intelligent edge.

Speaker 3

That that's helpful. Thanks.

Speaker 7

And then just a final one. In the in the release this morning, you talked about the the core business being down. Could you quantify that in the quarter?

Speaker 2

Yeah. We we basically what we indicated was that the booking rates in July have indicated to us that they're down 10%. We

Speaker 5

we,

Speaker 2

of course, did say that we would have growth in q three. Certainly, a lot of that due to the fact we have two more months of PCM in the numbers. So we will have growth top line growth in the quarter. But, overall, when we look at the the trending information, the booking rates are down to, like, 12 10%, whereas last quarter, actually, the trending was down 20%. So improving, but still still a negative number.

Speaker 1

My business, you know, that I would maybe add to that is, we we don't have a a pure view as to the core business being down. What we do know is that the combination of Incyte and TCMS reported last year on a year over year basis, we know that that combination is down. And it's down consistent with the 20% booking trend that we that we talked about at the beginning of the first quarter at the at the beginning of the second quarter. Sorry.

Speaker 7

Got it. Thank you. Very helpful.

Speaker 1

Thank you. Your

Speaker 0

next question comes from the line of Anthony Lodzinski with Sidoti.

Speaker 6

So I just wanted to get a little bit more color about the third quarter to date trends. Can you perhaps give us a sense as to the performance from the different vertical markets, different end markets, how those are performing?

Speaker 2

Yeah. Thanks for the question, Anthony. The certainly, the education market is doing very well. The k to 12 market has, you know, business learning becomes more and more the norm for the big investments there. Google Chrome is, by anybody's statistics, 75 to 85% of that market.

So very robust success going on in case of call markets for devices there. I think when you look at, you know, the the federal government spending, as a lot of those dollars around COVID start to get spent, we're seeing certainly some increases at the state and local level, as well as in the federal government. So this will be a key period for that, for the government spending this quarter. So we're we're anxious to see how if that really comes to fruition. When you look at the sort of corporate accounts, certainly, I think we all recognize that the lower end of the SMB space has probably been the most challenged in this environment.

How that sorts starts to bounce back, I think it's anybody's guess, but certainly I wouldn't expect that to be an improvement in q three at this stage. And then and then I think it depends upon this when you talk about corporate accounts and and specific verticals, it depends on, you know, health care, of course, overall is depends on the the sector that you're in and is actually very challenged as hospitals, of course, make most of their money, you know, sort of on elective surgeries, and they have been certainly sort

Speaker 7

of on and off.

Speaker 2

So hospitals, depending upon what aspect you're calling on, certainly their IT spend has been challenged, but we'd expect that would start to bounce back once more of a norm of elective surgeries is on the scene in a more consistent basis. The hospitality industry, of course, is very, very challenged. Airline industry, you know, challenged. Anything associated in that space you'd expect. But we do see that, you know, there's we have a lot of business, as example, with the cruise lines.

Obviously, not a lot happening in that space, so their spend is down considerably, but there is, you know, focus towards the future and what's gonna happen there. And there there will be a bounce back for that business, certainly not this calendar year, but certainly as we look into next year. So I think you have to we have to be very granular in looking at specifically on the verticals when we talk about the corporate accounts space. So it's a little bit of certainly little bit more of a mixed bag in that regard.

Speaker 6

Got it. That's very helpful. And so you touched on the SMB clientele. So with that in mind, how should we think about the bad debt expense for the rest of the year?

Speaker 1

I think today, we've had a pretty good handle on our bad debt expense. We've had a couple bankruptcies associated, which we've been able to cover in the normal course of our business. We have a process around our SMB clients with regard to how we've reviewed individual clients. We've had that we have an industry focus with regard to which industries are high risk, etcetera, and we're very judicious with regard to being on top of that segment of the market. And I would say that we're not seeing bad debt or bankruptcy so much in that segment.

What we're seeing a lot of is deferred delayed payments and request for extended payment term. Typically, for a short duration, you know, quote unquote, if they get back on their feet. We're also seeing that with large enterprise clients as well. Everybody is, you know, some taking advantage and some legitimately asking for relief. And for our large customers, we are providing that, and we have a process that we we go through to scrutinize the request, and then we grant it as as as necessary.

But part of it is making sure that we support our clients during this downturn, being judicious about the credit that we extend on a go forward basis, and looking through at the history of their performance with us to make a determination about how much are we willing to put at risk with them going forward. And it's a very measured risk, and we believe we have that, well enhanced to the team to our team.

Speaker 6

Alright. Well, thank you very much, and best of luck.

Speaker 1

Thank you. Appreciate it. And welcome to your first conference call with Insights.

Speaker 5

Thank you.

Speaker 0

We have no other callers in queue at this time.

Speaker 1

That concludes our conference call for today. Thank you very much for your participation, and we will be talking to you in the future. Thank you.

Speaker 0

Ladies and gentlemen, you may now disconnect from the conference call. Thank you for your participation.