NSIT
#Hello, everyone.
Thank you for joining us today to discuss our third quarter 2015 operating results.
In the third quarter, our team delivered double-digit sales and gross profit growth in constant currency, and we controlled discretionary expenses, which resulted in strong earnings growth year-over-year in the quarter.
Consolidated net sales of $1.34 billion increased 8% year-over-year in U.S. dollars.
Excluding the effects of currency changes, net sales grew 13%.
Gross profit was $182 million in the third quarter, up 6% in U.S. dollars and up 11% in constant currency.
And gross margin in these sales declined 30 basis points year-to-year to 13.6%, due primarily to the lower margin in the hardware category in North America and EMEA.
Consolidated selling and administrative expenses were $149 million in the third quarter, an increase of 4% year-to-year in U.S. dollars.
And excluding the effects of currency changes, SG&A expenses increased 9% year-over-year, reflecting planned investments in sales, technical, and services headcount across the business.
Consolidated earnings from operations increased 19% year-over-year to $34.3 million, excluding severance expenses in both periods and a real estate charge in this year's third quarter.
On a GAAP basis, earnings from operations increased 15% to $32.6 million.
Below the line EFO, we recorded $600,000 in non-operating expenses, including interest expense and foreign currency gains, which was down from $2 million last year.
And our tax rate for the quarter was 35%.
All of this led to diluted earnings per share of $0.59 on a non-GAAP basis and $0.56 on a GAAP basis.
North America net sales increased 15% year-over-year with double-digit growth reported in each of the hardware, software, and services categories.
For the second time in the Company's history, North America quarterly net sales exceeded $1 billion.
Q3 is a seasonally strong quarter for our public sector business in North America, and this year was no exception as we saw strong fiscal year-end spending in the federal space, as well as strong growth with state and local government and K through 12 clients.
In addition, we continue to see elevated spending by our large enterprise clients.
Our strong top line results in North America so far this year have been fueled by significantly higher spending on notebook and device refresh, server upgrade, and network infrastructure projects, by large enterprise and public sector clients.
In the hardware and services category, we have benefited from growth in these existing accounts, as well as large accounts recently added to our portfolio.
And in the software category, our federal team has experienced significant growth with new client wins across selling---+and cross selling into existing clients.
As we head into the fourth quarter, we are seeing sales trends moderate in North America, due to completion of certain multi-quarter projects, and to a more challenging year-over-year comparison following nice growth in last year's Q4.
In EMEA, net sales increased 6% year-over-year in the third quarter, with hardware increasing 5%, software increasing 8%, and services sales up 12%, compared to the third quarter of last year, all in constant currency.
The increase in hardware sales was due to a higher volume with corporate clients, most notably in the client devices, storage, and networking categories.
The increases in software and services sales were driven by a higher volume of virtualization software and professional services to new and existing clients across the region.
In Asia Pacific, third quarter sales---+net sales decreased 7% year-over-year in constant currency, due to lower volume with existing clients, primarily in Hong Kong and China.
The market continues to be relatively soft and our execution has been mixed across the region, which has led to lower than expected financial results in our Asia Pacific business this year.
We continue to hold our top line share positions with key publishers in our largest markets, and we're working to expand our cloud and professional service capabilities, as well as select hardware relationships in the region.
We believe these actions will help diversify our revenue sources in the market in 2016 and beyond.
One more update before I hand the call over to <UNK>.
I am pleased to announce that effective October 1, we acquired BlueMetal, an interactive design and technology architecture firm based in the Boston area with offices also in Chicago and New York.
BlueMetal delivers strategic design, application development, and business intelligence solutions with expertise, serving financial services, healthcare, public sector, and retail clients in the U.S. We believe this acquisition strengthens our services capabilities in the areas of application design, mobility, and big data, and are excited to introduce the BlueMetal capabilities to our existing strong client base.
Over the last 12 months, BlueMetal generated approximately $25 million in net sales.
We expect the transaction to be largely neutral to our Q4 2015 and full year 2016 earnings performance.
I will now hand the call over to <UNK> who will discuss our year-to-date third quarter financial results in more detail.
<UNK>.
Thank you, <UNK>.
For the first nine months of 2015, we are pleased with our sales execution across the business.
Consolidated net sales of approximately $4 billion are up 3% year-over-year in U.S. dollars, and up 9% in constant currency terms.
In North America, net sales have increased 10% year-over-year in the first nine months of 2015, with particularly strong growth in large enterprise and public sector accounts, due to new client wins and penetration of existing accounts.
In EMEA, net sales year-to-date are up 4% year-over-year in constant currency, with solid top line performance in the U.K., Netherlands, Germany, and the Nordics.
And in Asia Pacific, net sales were down 5% in constant currency, due to lower volume with existing clients in Australia and China, as well as a higher mix of software maintenance sales, which are recorded net in our financial statement.
Consolidated gross profit for the first nine months of 2015 was $535 million, up 1% in U.S. dollars, and up 6% in constant currency.
Gross margin was 13.4%, a decrease of 30 basis points compared to the same period last year.
This decrease is primarily due to decreases in hardware margins in North America and EMEA, due to client and product mix transacted this year, partially offset by the effective 20%-plus increase in services sales in the first nine months of this year.
On the SG&A front, consolidated selling and administrative expenses were $438 million, up 1% year-to-date in U.S. dollars, and up 6% in constant currency.
This increase was driven by headcount investments, primarily in sales and services in North America and EMEA, and higher variable compensation on higher sales and gross profits this year.
As a percent of net revenue, however, SG&A expense, excluding the impairment charges, are down 10 basis points to 11%.
Moving down the P&L, as a result of continuous---+a continuous review of our organizational structure in North America and in EMEA, we recorded severance and restructuring expenses of $1.9 million in the nine months ended September 30, compared---+2015, compared to $1 million for the same period in 2014.
Consolidated non-GAAP earnings from operations were $99 million in the first three quarters of 2015, down 3% year-over-year in U.S. dollars, but up 1% in constant currency terms, excluding the non-cash impairment charges and severance expenses in both periods.
Unique to this year of pronounced exchange rate volatility, this 4% swing is having a notable adverse effect on our U.S. dollar EFO comparison year-over-year.
Our effective tax rate year-to-date through September 30 was 37.1%, down from 37.4% last year.
Moving on to cash flow performance, our operations generated $25 million of cash in the first nine months of 2015, compared to $48 million in the same period last year, due to increased working capital utilization to support higher growth.
We invested $11 million in capital expenditures in the first nine months of 2015, up from $8 million last year, and we spent $92 million to repurchase approximately 3.3 million shares of our common stock.
This is compared to $30 million of share repurchases in the first nine months of 2014.
All of this led to a cash balance of $148 million at the end of the quarter, of which $121 million was resident in our foreign subsidiaries and $85 million of debt outstanding on our debt facility.
This compares to $127 million of cash and $52 million of debt outstanding at the end of last year's third quarter.
And from a cash flow efficiency perspective, our cash conversion cycle was 27 days in the third quarter of 2015, a decrease of three days year-over-year, due to expanded use of our inventory financing facility.
I will now turn the call back to <UNK>.
Thank you, <UNK>.
Moving on to our outlook for 2015, for the full year 2015 we continue to expect top line growth in the low single-digits in U.S. dollar terms.
In the fourth quarter, we expect diluted earnings per share to be between $0.56 and $0.61.
And for the full year, diluted earnings per share is expected to be between $2.10 and $2.15.
This outlook includes the adverse effect in gross profit of previously announced partner program changes in the software category, which the companies expect to be approximately $8 million for the full year 2015 and an effective tax rate of 38% for the fourth quarter, and average common shares outstanding of approximately 38.3 million for the full year 2015.
This outlook excludes severance and restructuring expenses incurred during the year, and the non-cash real estate impairment charge recorded in the third quarter.
Thank you, again, for joining us today.
I want to thank our teammates, clients, and partners for their dedication to Insight.
That concludes my comments.
We will now open the line up for your questions.
Matt, I'll take that one.
I think ultimately when we look at the results, we had a better than expected Q3, specifically as it relates to the public sector and some of the business that we won around the public sector business in Q3, and also, as it relates to our large enterprise clients.
We had some initiatives that we've been driving through the years that related to both product and services that are kind of ramping up with some large clients in the third---+at the end of the third quarter.
And then, starting in probably September, we saw a little bit of a slowdown in terms of our bookings associated with hardware in particular going forward.
So the guidance that we are giving here for the fourth quarter is reflective of the mix that we're seeing and the shift that we're seeing between primarily the large enterprise clients in terms of our expectations for what's going to happen with them in the fourth quarter.
And probably---+I'm not sure if you're factoring in---+that's a North America statement.
I'm not sure if you're factoring in the currency effect on a year-over-year basis that also would impact Q4 with EMEA particularly.
---+That was North America.
Our trends in---+I'm sorry.
The trends in Europe on a constant currency basis are okay.
I mean, I think they're in the low single-digits.
4% or so.
But not on an actual dollar basis.
I think that---+as you think of it from a sequential basis, I think you should anticipate that SG&A is going to be relatively flat Q3 to Q4, ultimately.
We are controlling SG&A growth in other areas of the business to support the technical and sales investment in SG&A that we are making across the board.
But I think in general, you should anticipate between Q3 and Q4 that there is going to be a little bit of flat---+SG&A is going to be relatively flat between the two quarters.
Thank you.
