Insight Enterprises - Earnings Call - Q3 2020
November 3, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the Insight Enterprises Third Quarter twenty twenty Operating Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session and instructions will follow at that time. I would now like to hand the call over to your speaker for today, miss Glynis Bryan. Please go ahead, ma'am.
Speaker 1
Thank you, Deborah. Welcome, everyone, and thank you for joining the Insant Enterprises earnings conference call. Today, we will be discussing the company's operating results for the quarter ended 09/30/2020. I'm Glynis Brine, chief financial officer of Insight, and joining me today is Ken 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 ks, 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 two hours after completion of the call and will remain on our website for a limited time. This conference call and
Speaker 2
the
Speaker 1
associated webcast contain time sensitive information that is accurate only as of today, 11/03/2020. This call is a property of Insight Enterprises. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of Insight Enterprises is strictly prohibited. Today's conference call, we will refer to non GAAP financial measures as we discuss third quarter twenty twenty financial results. When referring to non GAAP measures in today's call, we refer to adjusted earnings from operations, adjusted diluted earnings per share and adjusted 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 discussed are 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 k 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 with the slide presentation, we will begin on Slide four. Ken?
Speaker 3
Hello, everyone, and thank you for joining us today to discuss our third quarter twenty twenty operating results. I'm pleased to report that because of our dedicated team, resilient business model, and the PCM acquisition, we delivered another quarter of double digit adjusted earnings from operations growth year over year in the third quarter. The demand environment continued to be challenged, but we focused on answering our clients' most pressing IT needs while helping many to plan for investments needed to support the businesses as the economy recovers. During the third quarter, we drove double digit growth in services and cloud solutions, which improved gross margins to a new third quarter record. And when combined with the positive effect of the acceleration of our PCM integration, helped us achieve adjusted earnings from operations growth of more than 20% year over year.
Now turning to the third quarter results on Slide five. Consolidated net sales in the third quarter were 1,940,000,000.00, up 1% year over year, reflecting two additional months of TCM and our results in this year since the acquisition closed on 08/30/2019 and and lower sales in EMEA and APAC. We focused on growing our services and solution business mix, which helped drive gross margins up a 150 basis points year over year to 15.9 in the third quarter. And adjusted diluted earnings per share was $1.38 up 25% year over year, and then the GAAP basis diluted earnings per share was $1.1 up 45% year over year. Within these results, gross profit generated from cloud solutions was 18% of our consolidated gross profit over the past twelve months.
And finally, our business has generated 462,000,000 in cash flow from operations in the 2020, reflecting certain payment timing differences with partners and the benefits of our disciplined cash management practices. Turning to slide six. During the second quarter, we completed the onboarding of PCM clients to our Insight systems. In the third quarter, we completed the integration of back office operations and worked to consolidate spend across key categories, including IT maintenance, legal and accounting and marketing expenses. And we began to realize some benefits of our real estate consolidation efforts.
As a result, we now expect to exit the year with approximately 60,000,000 to $65,000,000 in annualized run rate cost savings in connection with the PCM integration, which is ahead of our first year expectations on our previously disclosed total commitment of $70,000,000 over two years. In the third quarter, we also invested in our sales force, adding key technical talent across our solution areas and additional sales coverage for our geographic footprint. We'll continue to invest in this area in the fourth quarter to ensure we are positioned well to compete in the marketplace in 2021 when we expect the IT market will start to recover. Also on the talent front, I'm pleased to announce that just two weeks ago, Joyce Mullen joined Insight as our new president of the North America business. Joyce spent twenty one years of her career at Dell Technologies in a variety of sales, service delivery and IT solution roles.
She brings to Insight a deep understanding of the channel and a history of leadership in delivering technology services and solutions to our clients. From a demand and product bookings perspective, hardware booking trends in North America improved sequentially in the third quarter, growing double digits although ending down more than 10% year over year. The strong growth in hardware bookings did not fully translate to net sales in the quarter, leading to elevated backlog heading into the fourth quarter. In addition, hardware bookings so far in q four are tracking ahead of q three trends, which we deem an additional positive data point as we close out 2020. Now on to slide seven.
Heading into the fourth quarter with the resurgence of COVID across the globe, many businesses are partially open, and many are still in work from home mode for most of their teammates. Moreover, as I just noted, booking trends are improving as clients appear to be focused on positioning the business to compete in a possible economic recovery in 2021. One example is that our cloud and data center transformation team, which was recently awarded a contract with a school district in Texas to build out its wireless mesh network. Leveraging our design, project management and implementation capabilities, this county will leverage federal COVID stimulus funding to ensure that students are able to continue their education in an ongoing remote learning environment. In addition, we believe we have gained critical market share in modern data center categories through our investments in new technical and sales power in our differentiated offerings over the last few years.
Our strategic partners are taking notice as we were recently named NetApp's 2020 Cloud Innovation Partner of the Year in recognition of our leadership in architected implementing supporting hybrid storage solutions and storage as a service solutions. And in June, Insight was named Dell's transformational partner of the year in recognition of our deep expertise in implementing modern hybrid data center technology as well as robust IoT and edge infrastructures. We also continue to innovate to help clients recover from the impact of the COVID nineteen pandemic, including adding contact tracing capabilities to Incyte's connected platform detect and prevention solution. This solution developed by our digital innovation business helps clients deploy and operate critical sensors, devices, and infrastructure that could detect symptoms that help prevent the spread of the coronavirus through its screening process. This comprehensive IoT solution, which we can deliver globally, is being received well in the marketplace with recent wins in the pharmaceutical and energy sectors in North America and the mining industry in Australia.
Our focus on strategic IT solution areas has allowed us to prioritize our capital investments, introduce differentiated offerings to our clients, and to bring value to our partners across the globe. In addition, we believe our values of hunger, heart, and harmony define our culture and allow us to attract talents and help us compete effectively in our industry. Just last week, our culture was recognized yet again as we were named to the Forbes world's best employers 2020 list. Insight ranked 27 among IT companies worldwide and number 296 overall. We believe our strong culture and clear strategy will continue to benefit our business as the market rebounds in the future.
I wanna thank our teammates across the globe for the commitment to insight in our clients. As we close out 2020, we'll 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 when the economy eventually rebounds. I'll now hand the call over to Glynis to provide more details on our financial performance. Glynis?
Speaker 1
Thank you, Ken. As Ken noted, we are pleased with our global team's execution in the first nine months of twenty twenty. So far this year, the team has successfully integrated the largest acquisition in the company's history and has delivered integration savings well ahead of plan the plan timeline. In a sluggish demand environment, we focused on selling services and solutions, which helped drive gross margins up more than 100 basis points year over year. We reduced our operating cost to meet current demand and accelerated the integration of TCM, which allowed us to drive adjusted earnings from operations growth of 15% year over year in the first nine months.
And to complement our strong earnings growth, our business generated record level cash flow from operations so far this year. As a result, in the third quarter, we paid off the balance outstanding under our ABL facility. We now have the entire $1,200,000,000 facility available to fund future growth. We set a high bar for ourselves coming into this year pre COVID. And while earnings are down versus our original expectations, our significantly stronger cash flow performance allowed us to deliver adjusted return on invested capital of 12%, clearly demonstrating the resilience of our business model and the operational discipline we have instilled across the business.
Moving on to Slide 10. Exiting the quarter, we are comfortable with our current leverage position of less than 1x 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 coverage over capital expenditures, taxes and cash interest. As of September 30, we're at 4x against the minimum requirement of 1x, and we're confident we can support our capital requirements and liquidity needs. As we highlighted last quarter, our cash cycle is inverted, meaning we pay our partners on shorter terms than we receive from our clients.
This allows us to drive more cash flow when sales decline sequentially. We have experienced this dynamic in the first nine months of twenty twenty, which has helped drive our above seasonal cash flow generation of $462,000,000 year to date. Our cash flow results have also benefited from approximately $100,000,000 in timing differences for partner payments that we expect will clear in the fourth quarter. For the full year, we expect cash flow generation will be in the range of $325,000,000 to $375,000,000 comfortably exceeding the top end of our previously announced guidance range. In the third quarter, our cash conversion cycle was twenty five days, down seventeen days year over year.
The improvement is due to a better collections experience on our accounts receivable of three days combined with an increase in DPO of thirteen days. The increase in DPO is primarily due to increased use of our inventory financing facility as a result of recent renegotiation of the facility and payment timing differences I mentioned. Before I re report on the financial results, I would like to remind everyone that since the closing of the acquisition in August 2019, the TCM book of business has been integrated into Insight Systems. As a result, we no longer report results for the acquired TCM business on a stand alone basis. Now moving on to North America, starting on Slide 11.
In North America, net sales were $1,600,000,000 in the third quarter, up 3% from prior year quarter, driven primarily by PCM. We saw saw strong demand with public sector clients, particularly in Chromebooks and device categories. We also continue to see strong services sales growth year over year at 12%, primarily due to increased adoption of cloud solutions and insight delivered services. Gross profit of $247,000,000 in North America was up 13% year over year, and gross margin improved a 150 basis points to 15.9%, primarily due to an an increased mix of cloud and services sales on the business and the addition of PCM. North America selling and administrative expenses, excluding amortization expense, increased 12% year over year, primarily due to the PCM acquisition.
Adjusted earnings from operations increased 20% year over year to $64,000,000 for the quarter. Moving on to EMEA on Slide 12. Net sales in the third quarter decreased 8% in constant currency to $341,000,000 Year over year, hardware sales increased 1% due primarily to higher volume sales of devices to public sector clients. Software sales decreased 12% and services sales increased 19%. Gross profit in EMEA in the third quarter was $50,000,000 and when combined with tight expense management, resulted in adjusted earnings from operations of $5,000,000 up 53% from the same period last year, also in constant currency.
In APAC on Slide 13, net sales in the third quarter declined 13% in constant currency to $57,000,000 reflecting lower hardware and software sales as a result of a decreased demand associated with the client's response to COVID. Despite lower top line, gross profit grew 2% year over year in constant currency, and expenses decreased 3%, which drove adjusted earnings from operations up 19% year over year in the third quarter. Moving on to our tax rate. For the 2020, our tax rate was 23.8%, which is lower than our prior year quarter's tax rate of 27.2% due to the rate impact of adjust acquisition related costs, which did not recur in 2020 and the beneficial impact of certain tax income tax regulations issued during the current quarter. Turning to details of the third quarter cash flow performance on Slide 14.
Year to date through the 2020, our operations generated $462,000,000 of cash compared to $169,000,000 last year. During that time, we invested approximately $21,000,000 in capital expenditures, up from $17,000,000 last year. As we stated last quarter, we expect CapEx for the full year will be between 20 to $25,000,000. We've also invested $6,000,000 to acquire Vimex in France in February, and we received $14,000,000 in net proceeds from the sale of one of our buildings earlier in the year. Lastly, we used 25,000,000 to repurchase shares of our common stock in the first quarter.
At the end of the quarter, we had a cash balance of $75,000,000 of which $57,000,000 was resident in our foreign subsidiaries compared to our prior year balance of 141,000,000 As I noted earlier, we had total debt of approximately $296,000,000 all of it in our convertible fixed rate debt at the end of the third quarter, and this is down from total debt of $837,000,000 as of the same point last year. As a reminder, we've taken several actions to preserve our profitability during the downturn while positioning our business to emerge emerge healthy and competitive as market conditions improve. Specifically, on the cost side, we reduced discretionary spending across the business and have rightsized our operational and delivery platforms to expected volume trends. We've accelerated our existing PCM integration plans around back office, sales and services, which allows us to realize approximately $65,000,000 in cost savings in our results in 2020 through Q3 and positions us to exit the year with run rate savings between 60,000,000 and $65,000,000 Heading into 2021, certain of our variable expenses that were not incurred in 2020 due to COVID related impacts on our financial results, such as sales rep commissions, executive compensation, travel, and certain other discretionary expenses are expected to be incurred if market conditions improve from current levels.
We currently estimate the benefit from these items in 2020 to be in the range of 30,000,000 to $35,000,000 In addition, we have made and plan to continue making select strategic investments in sales and technical resources across our solution areas to ensure we optimize our participation as market conditions improve. Our balance sheet is healthy. We have access to capital sufficient to operate in these uncertain economic times, and we believe the steps we have taken will help us emerge in a good position to compete as the economy recovers. I will now turn the call back to Ken for his closing comments.
Speaker 3
On to slide 15. 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 the cloud and the intelligent edge, developing and delivering solutions that drive better business outcomes for our clients, expanding and scaling 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 have taken appropriate steps to reduce our discretionary spending to ensure we have access to capital to support our short term operating plans are confident we will weather this tough economic environment emerge healthy on the other side. We currently expect net sales for the fourth quarter will be between 2.1 and 2,200,000,000.0, and adjusted diluted earnings per share will be between a dollar 45 and a dollar 55.
For the full year, net sales are expected to be between 8,100,000,000.0 and $8,200,000,000 and adjusted diluted earnings per share are expected to be between $5.88 and $5.98 Our outlook assumes a tax rate of 25.5% for the fourth quarter. This outlook excludes acquisition related expenses, severance and restructuring expenses incurred, amortization of intangible assets and amortization of convertible debt discount and issuance costs during the first nine months of 2020 and those that may be incurred during the balance of 2020. Due to the inherent difficulty of forecasting all these types of expenses, which impact net earnings and diluted earnings per share, the company is unable to reasonably estimate the impact of such expenses, if any, to net earnings and diluted earnings per share. Thank you again for joining us today, and thank you for all our teammates across the globe for their support of the company, our partners, and our clients. Be safe, and we look forward to talking with you again next quarter.
That concludes my comments. I will now open up your line for your questions.
Speaker 0
And your first question comes from Adam Tindle with Raymond James.
Speaker 4
Thanks. Good morning. Ken, I just wanted to start on the Q4 guidance and appreciate you providing that. It looks like it's going to imply that revenue is going to be up somewhere around high single digits on a sequential basis, which is pretty nice uptick, of reminds me of prior years where we had larger budget flushes. So maybe you could just touch on how you built those expectations.
I know there's been a couple quarters in a row where the press release is citing impact from COVID on internal budgets, but to an outsider, that just doesn't seem overly conservative. So it would would be helpful just to understand how you built up those expectations.
Speaker 3
Yeah. Thanks, Adam. I appreciate that. Yeah. In regards to the, you know, the traditional sort of budget flush for q four, I I don't really believe that's in the cards.
Now I think, you know, CFOs are certainly taking over quite a bit of the the control of spending in these environments. So I don't believe that companies are looking at budget flush. That's not certainly what we're talking about. But when we look at sort of the the backlog going into q four, I mean, look at just the trending that we're seeing. Certainly, sector will have nice growth in q four when you look at the the federal government, state and local, as well as the education market will will certainly grow very, very nicely.
And then we are starting to see some enterprise clients starting to, you know, look to, to spend to get back to more of a normalcy, if you can call it that environment. So that's all that put together, of course, you know, gives us the confidence of the, of the guidance we've provided for q four.
Speaker 4
Okay. That's helpful. Maybe just as a follow-up on on the PCM savings. You know, obviously, nice job tracking ahead of of where you expected to be. I think 60 to 65,000,000 exiting q four is up again.
I just wanted to ask, why not revise up the total 70,000,000 cumulative target? Is that because you're just kind of getting through, the the savings faster and the total is unchanged? Or or are you finding additional areas and there's opportunity to move that cumulative $70,000,000 up?
Speaker 3
Yeah. I'll let Clint's comment as well. I think your your commentary is correct. We're we're able to really accelerate as we focused on that, pretty significantly this year. You Sort of the wildcard in all that, of course, is the real estate aspects, which we certainly would have expected in the normal environment.
We probably would have seen more of those dollars in the next year or so. That change, obviously, based upon the the whole commercial real estate environment. So that sort of tempers us a little bit to keep at the at the 70 number that we've quoted. Florence, do want to add anything to that?
Speaker 1
Yeah. I I think you've kind of covered it. I think what we are we made a decision to try and accelerate the savings to get to the $70,000,000 number as quickly as possible. Part of it was, you know, we had the environment of COVID that allowed us to do that in terms of rightsizing the operation for the volume of business that we were seeing. So we took advantage of that to accelerate some of those savings.
Ken's comment about the real estate, in addition to what we're trying to sell, we also will get some savings in subsequent years as we as leases come out. We made a decision not to buy out of those leases because commercial buying out of a commercial real estate lease today is expensive. So we made the determination not to do that buyout, but just to keep them operational until we see the until the lease term expires. So we'll get an incremental savings, a couple of 100,000 in the years going forward, but not anything significant as those leases term out.
Speaker 4
Okay. That's helpful. Thank you.
Speaker 0
And your next question comes from Matt Sheerin with Stifel Nicolaus.
Speaker 5
Yes. Thanks. Good morning, Ken and Glynis. Just following up on Adam's question regarding your your relatively solid guidance for q four. Could you talk, Ken, in terms of the where where you see that spending going?
Is it continued to be your work from home and client devices? Or is that largely played out? And are you seeing a shift more toward the on prem infrastructure products where that obviously have been delayed for a couple of quarters?
Speaker 3
Yes. Thanks, Matt, for the question. Yeah. In regards to as I think you know that, you know, from a hardware perspective, you know, half the revenue actually comes from devices, in our business and in the channel overall. So devices is a significant play of that.
The, there's no question that Chromebooks will accelerate here into q four. It's a lot of units. It's about 30% of the unit volume for devices. About 13% of the revenue volumes come from Chrome because of lower ASPs. So that will certainly, continue to accelerate, and I think that will actually accelerate into q one from what we can see as there are, some shortage certainly significant shortages out there for those devices.
So the public sector piece, I think, will certainly be a strong growth trajectory here for, certainly for q four. As far as the the infrastructure piece, I'd say it's a little bit mixed as far as you know, certainly, some companies are recognizing that, you know, they have to digitize their business. And as companies have to digitize their business to become more modern, they also have to upgrade their infrastructure to become more modern, whether that be public cloud or whether that be private infrastructure. So certain clients are looking at that and making those investments. And others are still a little bit more like, hey.
Let's wait and see to see how this is going to really play out as far as So, we have invested in that area in in regards to the the infrastructure side of the business, with resources. And so we're trying we're gonna position ourselves to make sure that we're we're in a position to capture that, that rebound when it does occur. And as you know, this this is when you go through the ten year cycles we've been on, you go back to the great recession in 2009 where we all saw pretty substantial double digit declines in 2009 and 02/2010, you know, we saw 17% growth. Go back ten years before that with the .com, same sort of trajectory.
So we do believe that in IT, it's difficult to put these, investments off for for a long time and so that they will, you know, certainly start to recover. We're not sure when that's gonna occur in 2021, but, we're certainly positioning ourselves to take advantage of that.
Speaker 5
Okay. And and on the on the enterprise side, are you seeing, you talked about client device strength on public sector with Chromebooks, but are you seeing the same thing on enterprise in terms of the commercial notebooks, or is that is that weaker now?
Speaker 3
Yeah. We we are seeing that. And, again, it's very client dependent. We are seeing certain of our clients that in the enterprise side certainly coming back to life here from a device point of view here.
Speaker 5
Okay. Then, sort of backing into your, on your EPS guidance in revenue, it implies that gross margin, may be down a little bit, but still up significantly, seventy, eighty basis points plus from last year. Is that positive mix shift that you've seen in the last couple of quarters, is that continuing in terms of cloud services netted down, software revenue, that sort of thing?
Speaker 3
Yes, that's correct, Matt. You've got that right.
Speaker 1
Somewhat muted, Matt, by growth in hardware.
Speaker 5
Okay. And Chromebook margins are, I would imagine, lower than the rest of your hardware? Okay. Yes. Okay.
And just lastly, you talked about some headcount additions and adding to the sales force. Is that happening now? And does that impact OpEx? Because I would imagine OpEx, given that you still have some discretionary spend on hold, is not going to really move much from where it is now. But do you expect that the sales count increase to impact that at all?
Speaker 1
We we do expect the the increase in sales and technical resources to impact that, probably not so much in q four, but we're starting this investment over the last quarter and going into q four. So it will be a bigger impact going into 2021 because we wanna make sure that we're ready and prepared to address the, the improvement in the in the economy that we anticipate in 2021. When exactly, we don't know, but we anticipate an improvement in the economy in 2021. And some of the investments that we're making now is to be well positioned to take advantage of that in 2021.
Speaker 5
Okay. And you gave us the PCM integration and the synergy numbers, but is any of that does any of that play out in the December in terms of lower OpEx because of that?
Speaker 1
Yes. Well, we're going to end up exiting the quarter at 60,000,065 million dollars coming out of Q4, so there's a little incremental to that $55,000,000 in Q4. A little incremental. All right. Good.
Speaker 5
Okay. All right. Thanks a lot.
Speaker 0
And your next question comes from Anthony Lebiedzinski with Sidoti and Company.
Speaker 6
And thank you for taking the questions. So other than Chromebooks, are you guys seeing any other supply chain dislocations? Anything to call out there?
Speaker 3
Yes. Thanks for the question, Anthony. A little bit on the display side. Glass is certainly under a lot of pressure. So dependent upon obviously whether it be touch or so forth for certain products in notebook areas and certainly on the chrome side.
So glass is certainly a little bit of a shortage. There's still a little bit of tough situation
Speaker 4
on
Speaker 3
the processor side dependent upon where you are in that front with AMD and Intel as there's obviously significant demand on that area. So those two areas, I'd say, would probably be the most areas that we're seeing. Certainly constraints that lead mostly to device type constraints that we're seeing. Not too much in the other areas of the business, but of course, displays are impacted as well.
Speaker 6
Got it. And I know Europe is not a huge part of your business, but they're doing some lockdowns there various countries there. How should we think about the impact of lockdowns in some of the countries in Europe as far as impact on your business?
Speaker 3
Yes. Anthony, of course, we're already in The U. K. And sort of Germany and I'm pretty much going back to, I think, the way the world was for them in April. So it's not like we haven't seen this before.
And they weathered those storms pretty well back in the spring. We don't right now, we're not calling for any significant change in what we're seeing there. I think they're just going back to the environment where they were, but I still believe they're all now much more functional than we were in April in regards to how we conduct business. So we're not projecting or anticipating any significant decline there, at least at this stage. And The UK sort of announced it'd be four weeks sort of situation, and they extended.
But, again, nothing that we're projecting to have a a significant impact into into our numbers.
Speaker 6
Got it. Okay. Well, thank you, and best of luck.
Speaker 1
Thanks, Anthony. Thanks, Anthony.
Speaker 0
Your next question comes from Paul Coster with JPMorgan.
Speaker 7
Two really. First, Thomas, the 30,000,000 to $35,000,000 of variable expenses that you expect to be added back next year. Just can you explain that a little bit better? Is that just all things being equal? Or I mean as is?
Or does the business have to be in growth mode for that to be the case? Or anything else you can provide by way of color?
Speaker 1
Sure. It is actually a combination. So there's some things that will come back in regardless of growth. But the specific larger items would be depending what happens with regards to travel. We've made some decisions around we there was very little travel in 2020.
We've made an assumption about what we think travel will be going into 2021. Still some savings, but up from where we are up from where we are today. We've made some decisions around investments that we're making in the business. There are other discretionary areas that we pull back on in 2020 that will come back into business. Bonuses and executive comp will be impacted by performance in 2020.
So the combination of all those pieces, we assume going into 2021 will come back into the business.
Speaker 7
If there's a down year, would that range still apply, or would you look to
Speaker 1
It depends on how we budget. If it's a down year, would that range still apply? I think that there's certain expenses that will come back into the business even if it is a down year. How we address the down year would then be in a different manner. But if it's a down year, there are changes that we made this year that were one year changes.
And those are back in the business. And if there is a downturn, then we will have to figure out other ways to address the downturn.
Speaker 7
Gotcha. Okay. Thanks. And then the other question I had is the cloud netting that's taking place in net sales. Can you quantify the approximate revenue headwind that comes with that higher margin business?
I mean, for instance, if it wasn't netted down, how much revenue would
Speaker 1
it Right.
Speaker 2
Would it result in down,
Speaker 1
I guess we would have had revenue growth. I mean, higher revenue growth in software. The percentage of our business that is netted is in the 35% to 36% range on average. It's higher GP, sorry, GP. The netted business, pure netted business, is about 35% to 36% of our total GP.
That's higher in Q2 given the Microsoft year end and, the higher software component that we typically have associated with Q2, about 39% then. But on average, the negative components in our business is about 35% to 36%. And with hardware being down to date in the results year over year, that is lower margin that has helped boost our margins as you're seeing in our results year to date.
Speaker 7
But you think you would have delivered top line growth quite easily if it hadn't been netted down? I'm just trying to kind of
Speaker 1
Yes, yes. We would have delivered top line growth without the netting. I myself kind of thought that as we've been netting for the past couple of years that eventually we get to kind of some run rate associated with it. Cloud and digital are the winners in COVID. It's accelerated.
And I actually think that it's accelerating the conversion that we have seen to date from on prem cloud related solutions to off prem on prem non cloud to off prem cloud solutions, and that's going to continue going forward, and it will continue to impact our revenue.
Speaker 7
Okay. So last question, Ken, actually. I think I got the sense that edge is and hybrids are the biggest drivers. But then I kind of got a little bit lost with the commentary around the client side, hardware as well. Is it all three?
Which is kind of which if you could force rank them in terms of the growth at the moment, which is kind of driving things the most, if
Speaker 3
any of them. Yeah. From a hardware point of view, it's clear that devices is what's driving the growth in the in the in the industry right now from a channel point of view. That's very clear. There will be positive growth in devices this year.
And then, of course, the there will be declines, you know, in server storage, networking, and other in the other categories from a hardware perspective. So so, certainly, devices would be would be top of list. We're still, of course, very committed to an investment in in the intelligent edge, the IoT areas of the business. I think that's been a little bit slowed down by by COVID, where companies just are, you know, hustling down just to try to figure out, you know, how to keep their business is intact and not, invest in those types of areas. So but that will that will come.
There's no question about that as AI continues to drive the marketplace going forward. So we're we're still continuing to invest there. So so that was probably that was certainly more muted than we would have expected in 2020, but, we're confident that that certainly will will recover and return.
Speaker 7
Great. Thanks very much.
Speaker 0
Your next question comes from Mark Weisenberger with B. Riley Securities.
Speaker 2
Thank you. Good morning. Can you talk about the price sensitivity across customer cohorts and maybe end product categories? Are you seeing demand become kind of any less elastic, and and what are expectations for the duration of any change in behavior?
Speaker 3
I would say that, you know, the the pricing pressure is always in the marketplace, but I think it's actually been pretty rational for the most part in this environment where there's been, you know, certainly a lot less volume and demand. So it's certainly a competitive environment, but we don't see it being crazy by any means or anything like that. And obviously, our gross margin certainly reflects that. So I'd say it's been pretty rational at this stage. So nothing that we would say would be a concern at this stage.
Speaker 2
Understood. Are you seeing big changes in customer preference from vendor consolidation? And maybe which product categories is the lowest hanging fruit you're seeing in terms of gaining share?
Speaker 3
So on vendor consolidation front, a couple of questions couple of areas in that. So certainly, we see from a client perspective that all of our clients have been driving towards, you know, we want to do business with less partners as they're trying to streamline their business. And that's even more indicative in this environment where they're resource constrained and everybody's working from home, so they're trying to simplify their operations and do business with with less people where they can. So that consolidation, I I think, is only accelerating during the COVID crisis. So I think that should favor certainly some of the larger players in the industry who have more breadth and more capabilities.
We'll see how that continues to play out. So I think that's definitely happening. I think you're seeing it on the from a vendor point of view, from a PC front, there's no question that the desktop notebook business is consolidating to the large players, and that's been going on for quite some time. So the Dells, the HPs, the Lenovos, the the Apples, are certainly, you know, garnering more and more of the of the share of the business. So I think that's that's continuing as well.
And I I think you're seeing the consolidation efforts, of course, even on the infrastructure side with all the acquisitions going on out there in the marketplace. So I think that's just going to continue to accelerate from that point of view. And then, Mark, what was the second part of your question?
Speaker 1
Low hanging fruit.
Speaker 2
Just if if the vendor consolidation provides opportunity to to take share.
Speaker 3
Yeah. And I think it was the low hanging fruit. What was that?
Speaker 1
In product categories.
Speaker 3
Which product categories? I think from product category point of view, from a share point of view, the biggest area, of course, again, being notebooks. By the way, prior to going to COVID, it was about 52% desktop environment, 48% notebooks. And of course, now it's like 80% notebooks. And I don't think that's going to change.
So I think that area is certainly the biggest area of the business and also probably the easiest for companies to take share on.
Speaker 2
Got it. Are you seeing a change in preference in terms of duration of agreements and probably within the service segment, I would imagine, most? And how should we think about maybe any potential impacts on the P and L in the near and medium term from the change in duration of agreements?
Speaker 1
I don't know that I would say that we're necessarily seeing any change in duration of agreements. As we've made the move to the cloud and more of a subscription based model, Agreements have been anywhere between twelve to thirty six months depending on the particular vendor and how they do it. Most agreements are cancelable ultimately. So it's not necessarily so term dependent in some cases. There is a move by a couple of vendors to have terms and not have the agreements, the cloud agreements be non cancelable.
That may be a trend going forward, but it doesn't have a significant impact on us in that regard either going forward. But I haven't noticed people saying, I used to want a twelve month term and now we're switching to thirty six or vice versa. And that's not something we've heard coming back from the sales force at this time.
Speaker 3
It's also coming in a measured way for us, Mark, to our business. So it's not like it's one big fell swoop that would adjust our revenue and our profit streams. So it's been occurring over the last sort of five years in a very sort of measured way. So that's why I don't think you're seeing you know, it's not like Adobe. When Adobe has flipped their business in quarter or two, it's happened in a much more measured way for us.
Speaker 2
Understood. Got it. And and just final one for me. Can you remind us kinda what levels qualify for kinda how you think of large projects, and and how did that category perform sequentially and year over year? Thank you.
Speaker 1
You mean services projects, Mark? Is that what you're talking about?
Speaker 2
Sure. Or also maybe large hardware purchase orders as well.
Speaker 1
Oh, okay. So I would say that for us this year, particularly, one of the categories impacted the most has been those large hardware orders as clients have kinda pulled back with regard to usually around devices is what that would be where we do a rollout for our clients. Some of our clients typically have a software re hardware refresh cycle. I would say that in 2020, many clients may have put those on hold. As Ken mentioned in his comments, we're starting to see a little bit of that of clients starting to reengage in that in the fourth quarter.
So I'd say that was the hardest hit category in that regard. In terms of large projects, I guess we would play typically, I would say, in the sub $10,000,000 range when we're talking about a large project, not including all the hardware associated with it, okay? That could add on another usually there's a 10 to one sorry, five to one pull hardware, software versus services for each dollar of services. I'd say that those this year have also been constrained. And what we're seeing much more is on prem the move from on prem to the cloud, either SaaS, PaaS, infrastructure as a service that are not typically $10,000,000 onetime hits that you'd see on our p and l.
Those were slowing over time.
Speaker 2
Great. Thank you very much.
Speaker 1
Thanks, Mark. And your
Speaker 0
final question comes from Vincent Colicchio with Barrington Research.
Speaker 8
Ken, the sales force additions, are these going to be fairly senior folks that could of ramp quickly as business improves, assuming business improves next year?
Speaker 3
Yeah. Yeah. They are. So we've, this is a pretty good environment to hire folks because the, you know, good folks are available. So, yeah, very selective from a field point of view, but we are also additionally augmenting our inside sales team as well, and that tends to be a little less experienced folks that we certainly less costly, but less experienced to build that pipeline, of talent as well.
But it's it's really a combination. But, yes, we are, on the field side, be able to hire people that, have experience, can bring, you know, books of business and clients relationships with them. That's the goal and the objective that we've been on here.
Speaker 8
And could you give us some color on your thoughts, your current thoughts on acquisitions? Were you over a year into the PCM? You know, maybe talk about the pipeline and and pricing in the market and sort of, you know, your thoughts about doing something in the near future.
Speaker 3
Yeah. I mean, we're, we're certainly making sure that we maximize and optimize the PCM integration fully, but we're always out there looking. As as you know, the as we stated, you know, the PCM acquisition was sort of a two year courting process, but they do take long. So we always have a pipeline, and, of course, the timing is is not very predictable. It depends on the situation.
So we're pretty active, always looking at that. But for right now, we continue to look at acquisitions that will give us, again, more talent that we need, more tuck in type acquisitions versus scale acquisitions, although we're not opposed to any scale acquisitions. But right now, we're making sure we maximize the full integration here. If we had complete control of the timing, it would certainly we wouldn't be doing a large scale acquisition here in the near term. But we're obviously always pretty active.
I think the market's pretty robust. I think many of the valuations are pretty reasonable at this stage of the game. So there's definitely more opportunity there and more rational pricing in the market as far as acquisitions.
Speaker 8
Okay. Thank you. My other questions were asked.
Speaker 1
Thanks, Vincent. Thanks, Vincent. Welcome.
Speaker 3
Thank you. There
Speaker 0
are no further questions in queue.
Speaker 1
Okay. Thanks for joining us today. Have a good week, everyone.
Speaker 0
This concludes today's conference call. You may now disconnect.