INSIGHT ENTERPRISES INC quarterly report, Q2 FY2023

Insight Enterprises, Inc. — Q2 2023 Form 10-Q Summary

Business Context and Reporting Period

Insight is a global IT solutions integrator serving North America, EMEA and APAC. Its offerings include hardware, software, cloud solutions and services. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.

Financial Performance and Key Metrics

Metric	Q2 2023	Q2 2022	Change
Net sales	$2.350 billion	$2.743 billion	Down 14%
Gross profit	$433.2 million	$437.9 million	Down 1%
Gross margin	18.4%	16.0%	Up 240 bps
Earnings from operations	$118.6 million	$129.6 million	Down 8%
Operating margin	5.0%	4.7%	Up 30 bps
Net earnings	$80.5 million	$89.2 million	Down 10%
Diluted EPS	$2.17	$2.42	Down 10%

Q2 product sales were $1.946 billion, down from $2.349 billion; services sales were $404.0 million, up from $394.1 million.
Six-month net sales were $4.674 billion, down 13%; gross profit was $824.5 million, up 1%; operating earnings were $196.1 million, down 6%; and net earnings were $130.5 million, down 11%.
Six-month gross margin was 17.6%, compared with 15.1% in 2022. Six-month operating margin was 4.2%, compared with 3.9%.
Q2 selling and administrative expenses increased 4% to $318.2 million and rose to 13.5% of sales from 11.2%. The increase reflected service agreement fees, third-party transformation costs and higher personnel-related costs.
Q2 interest expense, net was $9.4 million, essentially flat year over year. Six-month interest expense increased 13% to $19.8 million as variable-rate borrowing costs rose.
The Q2 effective tax rate was 26.3%, compared with 25.6% in 2022; the six-month rate was 25.7%, compared with 25.0%.

Segment and Mix Trends

North America revenue declined 16% to $1.897 billion, primarily from a 25% decline in hardware sales. Software increased 11% and services increased 1%.
EMEA revenue declined 8% to $391.7 million; hardware and software declined, while services increased 9%.
APAC revenue declined 13% to $60.7 million; hardware and software declined, partially offset by 2% services growth.
Management attributed margin expansion to a greater mix of higher-margin services and cloud solutions, higher-margin software and infrastructure sales, and improved services margins.

Cash Flow, Liquidity and Debt

Operating cash flow for the first six months was $188.0 million, compared with cash used of $442.0 million in the prior-year period. The improvement was driven primarily by lower hardware sales, working-capital changes and partner mix.
Cash, cash equivalents and restricted cash totaled $198.0 million at June 30, 2023, compared with $139.6 million at June 30, 2022. Cash and cash equivalents alone were $196.0 million.
Capital expenditures were $13.2 million in the first half, compared with $47.3 million in 2022. Management expects full-year 2023 capital expenditures of $45 million to $50 million.
Total debt was $685.1 million, including $337.9 million outstanding under the ABL facility and $347.1 million of convertible senior notes classified as current because their conversion condition was triggered.
The ABL facility has total capacity of $1.8 billion and matures July 22, 2027. Eligible receivables and inventory supported availability of the full facility amount at June 30, 2023; $337.9 million was outstanding. The company was in compliance with its covenants.
Inventory financing facilities had $705.0 million of aggregate capacity, with $333.1 million outstanding.
The convertible notes mature February 15, 2025, bear 0.75% interest and exceeded the market-price conversion trigger during Q2. Holders could convert through September 30, 2023, with the principal required to be settled in cash if converted.
The company repurchased 1.634 million shares for $217.1 million during the first six months, including 720,175 shares for $100.0 million in Q2. Approximately $200.0 million remained available under the repurchase authorization at June 30.
Management expects operating cash flow and financing availability to fund operations, working capital, capital expenditures, debt repayments, acquisitions and share repurchases for at least the next 12 months.

Material Changes, Outlook and Unusual Items

Hardware demand, particularly devices sold to large enterprise and corporate clients, was materially weaker. Management believes the device market is near the bottom but expects device sales to decline for full-year 2023.
Supply constraints have eased overall but remain for networking and infrastructure products. Extended lead times could affect results into late 2023, and backlog remains above historically normal levels.
Management reported slower client decision-making expected to continue throughout 2023 and expects higher interest rates and interest expense for the remainder of the year.
Q2 included a $7.6 million gain on the sale of properties in Montreal and Sheffield, reported in severance and restructuring expenses. This was partially offset by approximately $3.8 million of severance expense.
The company settled the PCM Earnout Litigation in May 2023. A $10.55 million escrow payment was funded after quarter-end on July 14, 2023, to be paid over 36 months; the amount had previously been reserved.
The Hanu acquisition earn-out was finalized, and $10.7 million was paid during the first half of 2023. The company completed its purchase-price allocation in May without a material change to the preliminary allocation.
Management expects to use excess cash flow during the remainder of 2023 to pay down ABL and inventory financing borrowings and fund strategic acquisitions.
Seasonality is significant: sales and profitability are generally stronger in the second and fourth quarters, with public-sector demand also affecting quarterly results.

Principal Risks and Contingencies

Key risks include continued device-market weakness, supply constraints, pricing pressure, partner availability and incentive changes, higher interest rates, economic uncertainty, foreign exchange, cybersecurity and IT-system disruptions, and execution of cloud and transformation initiatives.
Accounts receivable increased to $3.666 billion from $3.272 billion at year-end 2022. Q2 days sales outstanding increased to 141 from 120, while the cash conversion cycle improved to 32 days from 48.
The company had approximately $168.8 million of cash and cash equivalents held by foreign subsidiaries, which may be subject to U.S. tax upon repatriation.
Performance bonds of approximately $28.0 million were outstanding, with no liability accrued because payment was not considered probable.
The company reported no material pending legal proceedings and stated that it had adequate provisions for probable and estimable losses.
Unrecognized tax benefits totaled approximately $13.3 million at June 30, 2023. Various tax audits remain ongoing, although management does not expect a significant effect on earnings.

Important Facts for Investors to Verify

Whether device demand stabilizes as anticipated and whether networking and infrastructure supply constraints persist into late 2023.
The pace of services, cloud and software growth relative to declining hardware revenue, and whether mix-driven margin expansion continues.
The effect of higher variable interest rates on cash flow, ABL borrowings and future earnings.
The company’s ability to reduce debt while funding share repurchases, acquisitions and working capital.
The cash-settlement requirement and potential share dilution associated with the convertible notes and related warrants.
Whether elevated accounts receivable and longer DSOs translate into increased credit losses or working-capital pressure.
The impact of the property-sale gain, severance activity and PCM litigation settlement on comparability of future results.