And this is part of my supply chain coverage here at Raymond James. Very happy to have the team from Insight here this morning. We have both Joyce and Glynis, CEO and CFO. In terms of our format, Joyce is gonna take us through just a high level overview, some slides, probably about 10 minutes or so. Take your time. For those that are newer to the story, and then we'll have plenty of time for questions. Would love to keep it interactive. If you have questions along the way, feel free to raise your hand, but we've got a total of 30 minutes, kinda half and half presentation, and then fireside.
Great. Thanks, Adam.
Thanks for being here.
Great! Well, thank you all for joining. I'm excited to talk to you about what Insight is up to these days. Normal disclosures, I won't spend any time on that. So just a quick summary of why we think it's worth your time to learn more about Insight. We are working very hard to define a new category in the industry. We're calling ourselves solutions integrators, and this is really born out of the fact that we know that most clients are really looking for outcomes. So they're looking for somebody to help them put together hardware, software, and services, deliver a solution that does something really important and good for their business, and we didn't feel like the old categories worked very well.
I spent a long time at Dell, and from there, it was clear to me that we saw the SIs trying to get smarter about products. We saw all the VARs trying to figure out how to get smarter about services, and what was really compelling to me about Insight is that through acquisition, Glynis and the team, for the last 10 years or so, had put together a series of capabilities in the fastest growing areas of the market: cloud, data, AI, edge, and cyber. The reason that was differentiated was really because very few companies were thinking about those things together, and the intersectionality of those things is pretty critical. It's hard to build a great cloud solution without thinking about data. Hard to build a great AI solution without thinking about security.
So that is a pretty big differentiator, and by the way, the edge is growing, and that has a lot to do with being able to put a lot of things in a lot of places all over the world. We also do have a fairly significant global capability, and we are pretty clear on this strategic vision, and it's all about delivering exceptional value to our clients and earning the right to do more. So we have demonstrated above-market, profitable growth, expanded our gross margins pretty significantly this year, and that's a combination of improved discipline around pricing, but it's also really a mix shift. More services, more cloud. Helped a lot by a really significantly declining device market this year, but that wasn't part of the original plan.
We also are leveraging automation and our own IP. We have over 100 patents. We use those to deliver services more efficiently, and that helps us with our gross margin expansion as well. Then finally, we do a pretty good job generating cash, and we've got a lot of capacity on our balance sheet for M&A, and we'll talk more about SADA, which is a company we bought on Friday. So this is just a pictorial view of what I just said. As I mentioned, we have basically four pillars there, you can see, but we really compete against systems integrators in two different ways. One is we have deep technology expertise. We understand roadmaps, we understand the technology partners, and we know how to work with them well, and we back that up with supply chain expertise.
The other thing that we do slightly differently from the big SIs is we focus on a corporate space. So think Fortune 300 and below, we know those customers. We are one of those customers. They have big IT budgets, don't have as expansive list of IT skills, I would say, and they need a lot of help. And so that is a pretty important sweet spot for us. We just, we certainly distinguish ourselves from resellers with our deep services expertise in those areas I just mentioned. So now we have over 6,400 technical experts who are really well-versed in cloud, data, AI, cyber, edge. And then we're not a distributor. If anyone calls us a distributor, we should talk about it, because we're not a distributor.
Okay, distributors, by the way, are very important partners to us. So we acquired SADA on Friday. We're very, very excited about this acquisition for a few reasons. First of all, the world is really multi-cloud. Over 75% of enterprises have multiple clouds. The average number is 2.3, 2.4 clouds per customer. And as a solutions integrator, to be truly trusted, we have to be able to adequately represent and support multi-clouds for the, for our customers. We have an extensive Azure practice. We're one of Microsoft's top five partners in Azure consistently, and that is a really core capability of ours that we're really, really proud of. And we had a pretty small Google practice and a pretty small AWS practice.
SADA is a Google Cloud Partner of the Year, six times running. I mean, they are a very significant Google Cloud partner, and this combination helps us with that multi-cloud capability that I just talked about. Obviously, it also is quite accretive in the short term, and it will be for the year next year, because of the success they've had in Google Cloud, and it positions us really with a very small group of partners who can actually represent Google Cloud and Microsoft effectively. We think that's also important, given the importance of generative AI, and both of those are leaders in that space. We bought this company for $410 million, and there's also an earn-out at target.
That earn-out is $210 million over 3 years. That keeps that leadership team engaged, the experts engaged, and we're really excited about that. They are a very enthusiastic bunch, and so we're really, really excited about the opportunities there. And then in 2022, the GAAP revenue was $251 million and we finance it with our ABL, basically, and cash. So we still are feeling good about our leverage, and we still have more capacity on our balance sheet for more acquisitions. I think I just said all that. Complementary culture and values, always quite important to make that go well. This is accretive to the top line gross profit, EBITDA adjusted, and adjusted EPS for the year.
And it expands our delivery capabilities in India, which is an important focus for us as well. So together, you can see sort of Insight before. Now with SADA, I won't go through all these numbers, but we're, we're pretty excited about the deep expertise that this allows us to support with our clients in both Microsoft and Google. There is an important element of seasonality that we wanna make sure you understand. So, this business is very, very concentrated in Q4, and in fact, December is a very big month. That helps us with. That's one of the reasons why it's accretive to us this year, with only one month being recognized. We expect that SADA will contribute between $50-$60 million in EBITDA and $0.55-$0.75 in 2024.
We just wanna make sure you all know that you can't take December and multiply it by 12. Don't do that, please. It's also quite... When you look at the seasonality in SADA, you'll see that when we publish all of the details in February, but you'll see that the first half is low to negative, negative to low EBITDA, and then it's quite accretive in the back end. The reason for this is, the way SADA works, they sign really big contracts, and we recognize the bookings. Because those contracts are over a 3- to 5-year period, and they are committed, we recognize all that revenue up front, so it's quite lumpy. We can talk more about that. Okay?
Oh, and it expands our gross margin pretty effectively. You can see the fuchsia here is where we have a presence. We have recently expanded the number of countries in which we operate, and that's somewhat around delivery. So we bought a company called Amdaris, which gave us more presence in Eastern Europe, helps us with consulting in Europe, and helps us with blended rates. So now we're in 26 countries from an operating point of view, and this helps us also support global customers. And our areas of expertise have not changed at all. So modern workplace, modern apps, modern infrastructure, obviously, the cloud activity falls in both modern infrastructure and modern apps, intelligent edge, data and AI, and cyber. And then we serve our clients through a series of services. I'll start at the bottom.
Hardware, software, and lifecycle services, this is very tied to product revenue. Consulting services are largely independent of product revenue, and every single project we do, we would love to have end it in a managed state, and that allows us to build stickiness with our clients, and then we demonstrate some good recurring revenue as associated with those managed services. And in our investor day that we brought everybody through in October of 2022, we outlined our 2027 targets, and you can see how we're tracking here. We said then that we would grow our cloud gross profit between 16%-20%. Trailing twelve months, we're at 24%. Services GP, five-year CAGR, you can see 14 versus our targets of 16%-20.
We expect that to improve as some of the product comes back, in a fairly significant down year for products, especially devices. EBITDA margin 5.3% on track to hit our 6.5%-7%, and then, well, you can see diluted earnings per share, ROIC, and free cash flow. And we can talk about those as well. And then our full year outlook, you can see as of December 1, 2023, so we will grow our gross profit, low- to mid-single-digit. We talked about the impact, with unadjusted diluted EPS of $0.20-$0.30, which gets us to $9.60-$9.90. Interest expense, you can see no real change in tax rate, no real change in capital expenditures or share count.
Okay, so this has not changed. This is our pretty disciplined capital allocation priorities. We invest in our organic capabilities because we have a lot of faith in the market. We have a lot of faith that IT and digital transformation is here to stay, and everybody needs it. So that's our focus. We also obviously invest in M&A, and the criteria there you can see. And then we do some stock buybacks. So you can see, we are also use our cash for that, and then we pay down debt as fast as we can. All right. That's it?
That's it.
I don't need this anymore. Glynis, you can sit next to Adam.
... So I have a lot of questions on the SADA acquisition, and we'll get to that here in a second. But before we do, you know, we're sitting here in December. Just curious, you know, what you're hearing on expectations for a budget flush this year relative to this time last year. I think with SADA, if there was, you know, some sort of major change, obviously, you kind of looked like you reiterated guidance, so to speak. So it would imply you're not seeing much of a change, but any commentary on sort of near-term demand trends would be helpful.
Yeah, I mean, I would say the common theme is everything continues to be very uncertain. We have seen some customers who are flushing budgets, and we have seen plenty who are not. So it's kind of a mixed bag, kinda like we said in our guidance.
Okay. And as you're thinking about IT spending in 2024, I think there's, you know, kind of various views out there from market forecasters that are a little all over the place. What are you hearing from customers?
Yeah. I mean, we haven't given any guidance yet, but I mean, basically, the way I like to think about it is, think about GDP at 100-200 basis points for IT, 'cause it generally grows faster than GDP. Channel generally grows a little faster than that, so.
Is there an area where you think customers might be continuing to spend or cutting back and digesting as you think about the different categories? You serve a lot of different vendors that investors care about.
I would say security remains really hot. I think we will see more expense around data management to get ready for generative AI-type projects, mostly getting the data estate ready. And then I think we'll see a bounce in somewhere in the back half of the year on devices. Windows 11 can't keep going down forever.
Any questions on demand trends out there? Quiet crowd. No?
No.
Okay, all the way.
Okay. Okay, well, I, I've got some on SADA. Obviously an interesting acquisition. Getting you more into the GCP framework, which is you know, you mentioned when we think about Insight, we often think about Microsoft. So, you know, buying one of the largest GCP companies, why did you make that bet now, and how do you think Microsoft will respond?
Well, I mean, we've been talking about acquisitions in the fastest-growing area of the market for a long time, and the way these things obviously work is you have to be in the right place at the right time. They gotta be willing to sell. You gotta have a good cultural fit. You gotta—like, all those pieces have to come together, and all those pieces came together. We have had a relationship with SADA for a long time, like 5 years or 6 years or something. So they were not new to us, and, you know, they, I think, thought it was a good time to figure out how to leverage access to all of our customers, and we thought it was a great time to invest in the Google ecosystem. You know, the generative AI thing also helps.
I mean, Google's a leader in that as well, and we expect them to do well associated around that. So I think it's a fairly good opportunity, and it made a lot of sense financially and culturally.
Culturally, yeah.
In terms of keeping the relationship with Microsoft, have you had any feedback or?
Yeah, of course. I mean, Microsoft's gonna care about us delivering results. We're laser focused on delivering the results to Microsoft, for Microsoft and for Google, and that's gonna speak louder than anything we say, but we've been in constant communication with Microsoft.
Is there kind of a notable difference in the way that Microsoft and Google do rebate programs or payments or something like that, that would change the model a little bit?
You know, Microsoft, I mean, so Microsoft's way more mature around how do we work with the channel than, I would say, either AWS or Google Cloud. It's very interesting that a whole lot of Microsoft people now work at Google in the channel. So I expect to see some similarities in the rebate programs over time. And, yeah, I mean, they're gonna continue to ask us through allocation of rebate dollars to focus on the areas that are most important to them, and luckily, we've been able to adjust.
That's a question that I get sometimes from investors, is how you get paid in selling Azure or selling GCP and how maybe that's different than selling a PC. Can you maybe just speak to the economics, so to speak? Is it kind of a one-time transaction that you get paid? Is it a continuous? And then if you wanna touch on netted revenue and the-
Why don't you answer? You just answered it 15 minutes ago.
Well, they're both netted revenue, I guess, ultimately, which means that GP revenue equals GP. It's netted because the ultimate obligor, in terms of delivering the service, is actually the publisher or the cloud provider in this particular case. We earn an incentive based on consumption associated with Azure, if you wanna think about it that way. So it's not one time, it's as it's consumed, ultimately. You have the ability to consume it by buying, you know, a terabyte pack of 10, 5, 1, any, any number there. And we earn as a result of that.
We actually are earning a little bit now as it relates to helping clients optimize how they use the cloud, 'cause, you know, the cloud tends to be expensive if you use it like your own infrastructure, but there are ways that you can help clients, we can help clients optimize that usage. And ultimately, we find that, yes, usage does decline initially, but over time, as they get comfortable, that usage increases again. So net-net, it's a win for the client, and it's a win for us.
Okay.
The only other thing I'd add is, all of these guys would like us to focus more activity on medium-sized and smaller customers. So some of that's good. It fits right within our sweet spot, and, so there's some incentives that are different depending on the customer we're serving.
Yeah. The other difference, if I could just add on, between Microsoft and Google—that, that is causing some spikiness now that we have with Google, is Google has 3-5-year co-contracts that are committed. The client is committed for 3-5 years. As a result of that, from a GAAP perspective, we have to recognize the revenue and GP upfront. Microsoft doesn't have that same 3-5-year scenario. It's month to month, it's consumption-based. They may have that with stuff they go direct on, but in terms of the channel, we don't have that lumpiness with Microsoft, although Q2 is always the largest Microsoft quarter.
Interesting. In terms of SADA, maybe one for Glynis, the valuation. So I think 410 is what you laid out in terms of the base, and then there's earn-out structure that Joyce mentioned. And then you talked about $60 million of EBITDA. Any... So if I take that, is it about a 10x multiple, or maybe just speak to the valuation multiple as the way that you're thought about?
Sure. So the earn-out is structured over three years. I'll just give you a little bit about the structure first. And in each one of the three years, it's a $60 million earn-out associated with that over the three years, through the end of 2026. Each one gets paid in the first quarter of the subsequent year. In the first year, they get a $30 million payout associated with that. It's all public disclosure in the contracts that we filed. In order to, we assumed target in terms of coming up with our multiple, and it would be right in that 10x range that you're talking about. If they over exceed, they're incented to over exceed from the $210 to the $390, and we would benefit as well in that.
But in that scenario, EBITDA would be higher than $60 million-
EBITDA would be higher than $60 million.
So the multiples-
But we'd have certainly a lot more incremental revenue-
Mm-hmm.
and EBITDA associated with that, and EPS
Okay.
if they were to achieve the higher number.
Got it. Okay. It just seems like a really attractive valuation multiple and a great deal. Any additional details on growth rates or underlying trends that could help the investor community understand potential upside for the deal?
I think that the potential upside is what we've laid out there with regard to their opportunity to earn more associated with the above their management plan. So we bought the company on what we think is a discount to their management plan. They have the opportunity to achieve their management plan and are incented to achieve their management plan. We wanted to make sure that we maintained the team in place because that team works really well together, good cultural fit with us, and we think can deliver their management plan. They believe that they can over deliver on their management plan, and I'd like them to do that.
What do you guys bring to them that can help them achieve that, though? What, what makes that, that merge you together with them?
We have a really big customer base-
Got it.
There's some obvious capabilities there. I think we have... You know, one of the very first questions we got from the all hands we had on Friday in Los Angeles was: "Hey, I have a customer, and they want to move some workloads to Azure. Can you help me?" which is kind of the inverse, but there's certainly customers out there who are asking us to help them move some workloads to multiple clouds, and we're in a position to do that, including on-prem now. But I would say it's the biggest benefit is the customer base.
Customer base, yeah.
And the fact that we're a trusted advisor in cloud already to many of these clients.
and the fact that there's a good cultural fit.
Yeah.
You know, at the end of the day, it was a family-owned business, and I think that they were interested in making sure that they were delivering the business into a safe pair of hands that would be able to help them move forward with regard to the vision they had for the company.
Are they growing on pace with what Google has publicly disclosed what their cloud is?
They are not growing at that same pace, but they're on a track to get to that same pace.
So, I mean, what's the cause of that delta that might have?
I think it could just be a combination about where they were focused on in 2023, more specifically. That's why we're not commenting on the numbers, 'cause the numbers aren't baked yet. December is a very big quarter with regard to, big month, with regard to their delivery. But on average, I would say that they're not tracking to what I see as the Google-reported cloud numbers. And there are two different ways of looking at it, and it matters. I cannot believe I'm talking about it.
I can't either.
I swore we were never gonna talk about this. There's the GAAP revenue that I discussed, so three years, that's recorded upfront. When you look at the consumption revenue, which is how that revenue is consumed? So when you do that recording of the revenue and GP upfront, netted, it creates an asset and a liability on the balance sheet. As the client consumes the revenue, that asset and liability declines. It doesn't flow through the P&L anymore, but that asset and liability declines. And when you look at consumption, which is what Google reports, their consumption revenue is consistent with Google's revenue, but you don't see it necessarily in the netted GAAP revenue that we report. And I'm never talking about consumption again.
Billings for SADA, like cash flows near the consumption revenue or the GAAP revenue?
It's closer to the consumption revenue.
Gotcha. Cool. So if you're growing really fast and signing a bunch of customers, you'll convert a lower percentage up front, you'll recognize-
Yes
... the revenues, but then actually over time-
Over time, it grows. Yes. Yeah, that's exactly right.
Maybe adding on to that, do you think you'll gain halo effect, signing up more apps around either Google or Microsoft, as you know, people are not only using the cloud, but the AI end of it, or can you maybe give us a little bit of color on that?
We do believe that as we can demonstrate more expertise across a broader set of clouds, that we will help grow consumption in those clouds. Because as Glenn has said, we can help them optimize their spend, and so as they feel better about that spend, then they understand it's more predictable, and then they're, we've seen this over and over again, that they spend more. And then we do think that AI will be an accelerant, probably not a meaningful financial impact in 2024, more in 2025. There's more preparation, I think, that is happening in 2024, so we'll see some of that in our consulting business. But certainly, everyone's quite interested in AI. The question is, does it pencil, like, the pricing? It's all that stuff that people are trying to figure out right now.
You have to get the right data.
Yeah, you have to-
You have to get your data right.
Get the data right, yeah. Which, by the way, we like, 'cause we can help them get their data right.
Good questions. Just to clarify, so it sounds like, you know, obviously, you had your first all hands with the SADA team, and what you're alluding to there would be revenue synergies?
Mm-hmm.
Just talk about what you assumed in your initial outlook, and then how we could maybe think about revenue synergies, moving forward.
Hmm.
You assumed, I think, minimal to no revenue synergies, right?
Yeah. I mean, there's the earn out at Target represents significant growth, so we didn't add anything onto that.
Onto that.
Yeah.
We also didn't consider cost synergies either, 'cause it's not really a cost play for us. It is, it is the revenue-generating capability and the new capability that we can grow incrementally with, but not included in the analysis.
So revenue synergies back and sort of organic Insight, we didn't, we didn't bake any of those into our current plans.
Okay. Right, so the $200+ of revenue that you're showing for SADA is just what they are currently-
The management plan.
The management plan for 2023?
Mm-hmm.
Yeah.
Mm-hmm.
Got it. Okay.
No, no, the management plan for 2024, 2025, 2026.
Oh, that's a forward.
Yeah.
Yeah.
Yeah.
Got it. Okay.
2023, I guess.
Okay, sorry. So 2022 is $251 million revenue, $200 million of gross margin, just to be clear.
Okay. Okay, got it. And then what other strategic options have you considered? I mean, I know you just announced this deal, so I'm sure your hands are full with this one. But, you know, one of the things that I would think about is, you know, very strong Microsoft, now very strong GCP, AWS, you know, would be maybe an angle at some point in time. You know, would that make sense? What other strategic options as you think about putting on cloud?
Yeah, I mean, we have been really consistent around fast-growing areas of the market. So cloud, AWS, would fall into that. Data, there's a whole bunch of different companies that do data management that are. We have a lot of skills, for example, in Databricks, we have some skills in Snowflake. There's a lot of some key applications that are related to data management. You know, those kinds of practices could be interesting. Cyber is the other place that we believe that we could, we could improve our skill set and expand our capabilities dramatically to help with our clients' requirements.
Maybe time for one last question out there.
For Windows 11, like, can you maybe just talk about the previous, was it nine, ten? I can't remember which number.
XP.
Yeah.
That was, that was 2014, 2015, right? Mm-hmm.
You know, what that experience is like, and you would expect this to be sort of similar.
Similar to XP?
Yeah.
Oh, I hope not. Wasn't that terrible?
It was a good one.
XP was a good one?
Yeah.
I don't know. I didn't care then.
I can't remember though.
So, in terms of how that plays out through our client base, what I would say from prior operating system releases is that our client base on the large enterprise side, they adopt later. So they do more of a evaluation within their IT departments with regard to how is this new technology gonna fit into the existing framework that they have? Do they wanna buy all new devices right up front, or do they wanna do the kind of sequence with regard to how they adopt over time, and roll it in over a 3- or 4-year period?
So, in general, when the market picks up and maybe SMB and corporate clients start buying, we'll benefit from that, but you'll also see us benefit a little bit later on from when our large enterprise clients refresh, and they typically follow 6-9 months later than the rest of the market.
You're right, XP was a good one. I was thinking of seven maybe or some nine. There was a really bad one in there. But I also think Windows 11, I mean, Microsoft's doing a really good job trying to build in AI capability-
Yeah
... into that release, which I think will be a driver as well, so.