Okay, good morning, and thank you for joining us at the Sidoti September 2024 Investor Conference. My name is Anthony Lebiedzinski, and I'm the equity research analyst that covers Insight Enterprises here at the Sidoti, ticker symbol NSIT. It is my pleasure to introduce James Morgado, who is currently SVP and the CFO for North America at Insight, and effective January 1, 2025, he will become CFO of the company. So congratulations, James. In addition, we also have Ryan Maiocco, the company's investor relations director, joining us as well. So the format for today will be a management presentation for the first 20 or so minutes, and then we'll open up for Q&A.
For those in the audience, if you do have a question, please type your questions into the Q&A box at the bottom of your Zoom screen, and I'll read the questions out loud. So with no further delay, James, the floor is yours.
Thank you, Anthony. And let me first start by saying thank you all for attending, and any of you that are listening to this on replay. I have a few slides to share that tell Insight's story. I'll try and as Anthony said, I'll try and reserve ten minutes or so for Q&A. Before I get started, we're in the last month of our quarter, so in terms of Q&A, I won't be able to address or answer any questions that are specific around numbers or outlook for the year. And one other housekeeping, as you can see here, here's our standard disclosures, which I'm not gonna read through, but they are available for your reference.
So first slide that hopefully gives a good overview of Insight is, well, you know, our strategy really is to become the leading Solutions Integrator. We introduced this at our investor day in late 2022. I have a slide coming up that will describe a little more about what a Solutions Integrator is. But at the highest level, it's around combining our expertise in software and hardware, along with our multi-cloud capabilities and our services portfolio to drive very discrete and deliberate outcomes for our customers. We're a global company, and so we have global capabilities. We're focused in three regions, North America, EMEA, and APAC, with North America being our largest region. We have global delivery capabilities.
We have centers of excellence in three kind of key areas in Manila, in India, and most recently within Eastern Europe. I think from a leadership standpoint, we have the right combination of long-tenured Insight leaders, along with new leaders who've joined us in the last several years that help drive our solutions integrator strategy. As a reminder, Joyce Mullen is our CEO. She took the reins at the start of twenty twenty-two and has shepherded in this leading solutions integrator vision, as well as many of the economic model improvements that we'll talk about in a moment. We've added some really deep leadership talent in terms of the services side. A couple of examples, Dee Burger joined us about two and a half years ago.
He's the President of North America. He's got thirty-plus years of experience from Capgemini. Adrian Gregory is our President of EMEA. He joined us within the last year and a half. He comes with deep services experience. Most recently, he was at Atos. We are from a focus standpoint, we're focused on the fastest-growing areas of the market, think cloud and services. Our services range from anything that we would attach to the product life cycle. So that's all the way from integration services at the very beginning all the way through managing events that might occur throughout the life of hardware. We also have managed services capabilities, such as what we provide around software asset management.
And then lastly, we have deep professional services experience that range from anything from data and AI to security to app development and migration to data center on-prem data center architecture. We have focused, particularly over the last two years, very deeply in terms of making meaningful improvements to our economic model. That came in two broad areas. One is around our gross margin expansion, and you'll see a slide coming up where it demonstrates some of these improvements. But from a gross margin standpoint, that's a combination of both mix as we grow faster in higher margin areas of our business, like cloud and services. And then the other half is really contributing from a structural change in how we manage margins around our product portfolio and our services business.
In combination, we also have driven OpEx leverage, which you'll see has manifested itself from improvement in our EBITDA margins. We generate very healthy cash flow, so we are currently somewhere in that $300-$400 million range of cash flow. We used to be in that $180-$220 million range, so meaningful improvement in cash flows. I think that helps contribute, as well as our strong balance sheet, contribute to our capacity to be able to not only fund our organic investments but also fund our M&A roadmap, which we think is strategic to the solutions integrator realizing the solutions integrator vision. One last point, at the start of this quarter, we had $165 million remaining on our share repurchase authorization.
Glynis mentioned at the end of in our Q2 earnings that we would be in the market throughout Q3, and that we would expect to execute against that $165 million in the Q3 timeframe... So that's a bit of an overview on Insight. I wanted to dive a little further into solutions integrator and the strategy around a solutions integrator, and then hopefully define it a little bit better at when I get to the bottom of the slide. But our strategy has four key pillars. The first is that the customer is central to our strategy, and really, what we want this to be is we want to be the partner that our customers can't live without. We're driving outcomes and earning the right to do more for those customers.
For those of you new to our story, this really isn't around a customer acquisition strategy. Rather, this is driving deeper into existing customers. For example, in North America, we have over 30,000 customers that span multiple customer segments, and you may hear me refer to this, but we break down our customer segments in terms of enterprise, which is the largest companies in the world. Corporate, which is kind of that group right below there. And then commercial is more of our midsize. We really do not play in the small market, small customer market. Then we have a public sector segment as well. Just by way of order of magnitude, corporate and enterprise combined account for about 70% of our total revenue.
The next pillar to our strategy is around delivery and differentiation, and we do this, you know, through our strong technical talent. We've been building this for many years, both organically and through M&A. We think this sets us apart from many competitors, and I'll talk about that in a moment. Championing our culture, we think our culture is really our secret sauce, our values, our Hunger, Heart, and harmony. One way that this manifests itself, besides you know, really deep alignment, I think, at the leadership team, we have the ability to recruit and retain technical talent well above our company of a company our size. I think really, if you broaden this, we have the ability to attract and retain talent across all of our functions.
And if you ask many of our leaders why they joined Insight, particularly the ones over the last several years, they would, myself included, comment that the culture is one of the key attractors to Insight. And then lastly, our strategy is around driving profitable growth. I'll break that up between growth and the profit side of this. But we, you know, are focused. I've mentioned this. We're focused on the fastest-growing areas of the market where we think we can differentiate ourselves. So that is in areas like our multi-cloud strategy.
We participate in Azure, in GCP, and in AWS, as well as our, you know, our ability to drive growth and security and data and AI and cloud migration and on-prem architecture of data centers. In terms of profitability, I've mentioned this, we have made significant progress on our economic model. I'll demonstrate that on a slide in a moment. The bottom of the slide is sometimes the best way to define something is to talk about what it's not. And so we put this out here deliberately to explain the difference between a solutions integrator and what a systems integrator is versus a reseller. Starting at the top, we are not a systems integrator. Think of a systems integrator as the Accenture and the Capgemini of the world.
Some of the areas that we're different from a systems integrator, we certainly have similar technical talent and capabilities, but we don't participate in all the same market areas that a systems integrator would. For example, we do not do ERP implementations. A systems integrator will also focus more heavily on that top enterprise space. Think of the Fortune 100 and smaller, and their engagement model is different than ours. They, you know, they're multiyear, very large projects in order to support their economic model. We focus on more reasonably sized projects, demonstrating the outcomes and really earning the right to do more. We're also very focused in the corporate segment.
So think of that, you know, below the Fortune 150 or so, all the way down to that commercial or mid-market segment. That is a sweet spot for us, where a systems integrator, it's difficult for them to prove the economics around that, to reach down into it, versus how we're positioned with many of those corporates today. And then lastly, a systems integrator doesn't have the depth of the partner relationships that we do. We have very deep partner relationships with all of the largest high-technology OEMs. So think of the Microsofts, NVIDIAs, Cisco, Dell, Apples, Lenovos, et cetera, of the world. We are also not a reseller, purely just a reseller. We certainly have a heritage in being a reseller, but we've moved well beyond there.
One of the key ways that we differentiate ourselves from a reseller is the full suite of technical capabilities that we can bring. As I mentioned, anything from app development and workload migration to the cloud, all the way through to being able to, you know, do projects around data and AI, and most recently, GenAI. And then lastly, we are certainly not a distributor. Distributors are important to our partner ecosystem. We leverage distributors, but a distributor does not carry the technical capabilities, nor have the end customer relationships, that we do. I've mentioned on the next slide, I've mentioned a couple of times our financial performance. I think this demonstrates the improvements that we've made.
This slide represents everything on a trailing twelve-month basis, so it takes out any of the seasonality in the business. In the upper left-hand corner, you can see this is almost a 400 basis points improvement in gross margin. This is a combination of mix. So as cloud and services grows faster, we have a natural tailwind to our business, 'cause those are higher margins than our hardware portfolio. And so about half of this contribution over this time is related to mix. The other half is really structural changes that we've made in the business, focused on driving margins in our product portfolio and our services portfolio. We started this in sort of the midpoint of 2022 in North America.
It has reached scale largely in North America, and we've since rolled this out, the same sort of plan and process out in EMEA, and they're in the earlier stages of adoption there. Upper right-hand corner, this is one of the strategic growth areas for us. This is our cloud, our cloud business. It represents our cloud gross profit growth. You can see it's very consistent growth in over this period of time. I think it compares favorably to, you know, the three large hyperscalers growth. And then, EBITDA margins in the lower left-hand corner, we're real, real proud of this. This is a combination of gross margin improvements as well as OpEx leverage that we've been driving.
If you went back in history and looked at our EBITDA margins, back in time, for many, many years, we were sort of range-bound in that 3% to upper 3% range, so this is a meaningful improvement over the last couple of years. And then lastly, and certainly not least, is cash flow generation. Our... You know, this is very solid. We think of cash flow as a percentage of our net income. This has been well over 100% during this period of time. This belies the story a little bit. You know, these are not the long-term type of cash flow above 100% of net income. This period of time really is a function of the device profile and devices.
Growing slower devices, by the way, are our laptops and desktops, largely on the hardware side, that we would resell. And during this period of time, there was a decline in device revenue. And devices have a, they use working capital for us that we pay our vendors on shorter terms than we collect from our customers in terms of the device profile. So in periods of rapid growth, we will see this measure come down. In period of decline of devices, we'll see this go up. Over time, we would expect this to kind of normalize back into that above 90% range, as a percentage of net income. But overall, very healthy cash flow generation.
I mentioned that we have global scale, so we have presence in over 27 countries. Now, some of these countries are selling locations or operational locations. The operational locations are the centers of excellence that I've mentioned, so Manila, India, and now most recently Eastern Europe. We also have very deep technical talent, which I think is critical to our strategy. We have over 6,500 technical professionals and growing. You know, these skills cross security, data, AI, app development, cloud migration, network architecture experts. We have over 130 patents that are pending. I think we've received approval for about 18 of those, demonstrating the deep technical talent that Insight brings. So how did we get here? We...
Our heritage, you know, we were founded in eighty-eight. I think we went public sometime in the mid-nineties, but our heritage is born out of being a reseller. I won't cover all of the history. I think where it's meaningful is where we have boxed in kind of that twenty-fifteen period of time, where we really focused on driving our services and solutions and technical capabilities. We first started, we were building some of this organically, but really through M&A, it really accelerated our capabilities. We were first focused around building out our services and technical capabilities on the Microsoft platform. So we acquired, you know, BlueMetal. They were an award-winning IoT partner for Microsoft. We purchased Cardinal Solutions, which also bolstered our technical capabilities.
During this period of time, we also focused on some of the core areas of our business that complemented our services strategy. For example, we acquired Datalink. They're an infrastructure company with deep expertise in on-prem data centers, and that complemented what we were building in terms of our Microsoft cloud capabilities. We also did a scale acquisition in 2019. That helped. That was really around a synergy play and helped build and bolster our commercial business in North America. What I think is more impactful really, as we think about the recent acquisitions that we've done, starting with Hanu kind of in that midpoint of 2022. Hanu is a Microsoft cloud service partner. They're an award-winning partner.
and so not only did they help bolster the expertise there, they gave us a deeper footprint in India. They have an amazing recruiting process for early career talent in particular, that helped us build that funnel of talent for India COE. last year, kind of mid-year, we purchased a company called Amdaris that was focused in EMEA. They're a Microsoft Gold certified partner. It gave us very strong digital capabilities in EMEA and is helping us build a center of excellence in Eastern Europe. and then at the end of the end of last year, we purchased a company called SADA, which was a leading Google Cloud partner. they're a six-time GCP Partner of the Year winner. the instant scale in the GCP platform. We had an organic business in GCP.
This took the organic business and put us in as one of the top GCP partners to complement us being one of the top partners in the Azure platform. We also do have an organic, a much smaller organic AWS practice, but that's also a growing business for us. And then most recently, which I have an example of on the next slide, we purchased a company called Infocenter, and they're a pure play ServiceNow partner. And I'll describe it a little bit on the next slide. They bring us capabilities. Really, Infocenter brings us capabilities that Insight didn't have before. So we had a small ServiceNow... Ryan, if you can go to the next slide. We had a small ServiceNow organic practice that's really bolstered this.
This example here is, this was a customer who's a major payment processing company. They were splitting out from their parent company, and they really needed to, you know, build their entire IT infrastructure from the ground up. They needed ServiceNow to help from an IT management perspective. InfoCenter, the reason I bring this up is Infocenter has a very unique engagement model with our customers, which we are learning from. Actually, even though we have a very robust services business, we're learning from this acquisition. They have the highest customer sat out of any services company I've ever seen.
Their process, they engage really in something called a Radius, which is an upfront assessment that helps align Infocenter and the client to the goals and the outcome and the exact rollout of the implementation. That leads to DevShop, which is a trademark name that is around not only combining the implementation, but attaching the managed services to that. So everything. Their motto is, "Everything ends in DevShop," which is everything ends in a managed services engagement, which is how they drive their high customer sat through the Radius and through their DevShop through their DevShop motions. KPIs for success, and I think this is the last slide, but these are our long-term KPIs that we introduced at our Investor Day in 2022.
Good, and there's a quick snapshot of how we're performing against each of these. Overall, I think we are on track. You know, first, starting at the top, the idea here was to focus on key growth strategic areas for us, and we said that over the five years we would grow in the 16%-20% range. I think we're off to a very strong start in cloud. Services is a tick underneath the range, but that is really a function of more of the markets over the last year than anything else. EBITDA margin, I mentioned we're really proud of this. Our long-term goal that we laid out was to be in the 6.5%-7% range, where we're at 6.2% on a TTM basis.
This reflects the significant margins improvement, gross margin improvements that you saw, as well as OpEx leverage. EPS were admittedly below the range. That's a function of the markets, in particular, the devices drop in device revenue over the last year and a half. But you know, we're still early in these goals, and I think that there's more than enough time for us to potentially crawl back into that range. ROIC, the goal that we put out there, greater than 25%, was a view of the business if it were to stay largely organic. We're currently at 17%, and that really is a function of the fact of the three acquisitions that I mentioned we've done in the last year around Tara, SADA, and Infocenter.
But, you know, we feel that we're on track with our ROIC, given the backdrop of the M&A. And then lastly, I talked about free cash flow, which, you know, we're admittedly well ahead of that. We would expect this to normalize somewhere back down into that range, you know, as the device growth returns into the business. Okay, that was all I had to share. Hopefully, you found that informative. I know it was a little bit quick, but I wanted to make sure that I reserved time for any questions.
Yeah, thanks, James. Yeah, that was a perfect overview, I think, of Insight. And, as a quick reminder for those in the audience, if you do have a question, please type it into the Q&A box, and I'll read the questions out loud. So I, you know, I'll first start off with a question of my own. Just wanted to follow up on the point that you made, James, about the structural changes you have made to your product portfolio. On the one hand, you do have cloud and services helping out with your growth margin, but wanted to more specifically, just to ask you about the structural changes that you have made. What inning are you in with that?
You know, you know, maybe if you could just go over some specifics, that'd be great.
Yeah. So we started this in North America in the middle of twenty twenty-two, and we really started first in the hardware business. And this was a combination of things. One is we have an amazing set of data to leverage in terms of how we price our products across all our customer segments. And so we leveraged that information to know what average margin profiles were, and put that in the hands of sales and created a deals desk that, you know, anything that didn't meet average margins, it escalated to the deals desk for additional review. So it's kind of basic blocking and tackling in some aspects of it and creating more discipline around that.
We also did, you know, we also did things like in the services business, we were real focused on driving services margins. You know, we tied compensation for sellers in terms of margins, so the higher margin performance that we could sell things at, the more that a seller could earn, they could accelerate their comp. We made a concerted effort to manage utilization of our resources. I think the Hanu acquisition and building out the India Center of Excellence in greater scale also helped with our cost structure there. So all of these things combined. In North America, we're in the middle to later innings of this. I think we still have room to expand margins.
What I would say is the pace of margin expansion in North America will likely slow. But the overall, you know, overall improvement of margins, we still have, I think, more opportunity to continue to expand. And then, you know, a bigger opportunity in the shorter term is leveraging this into EMEA. They're a smaller percentage of our overall revenue versus North America, but we still have a meaningful improvement there.
Gotcha. All right, so, yeah, we have about five minutes left, so let me get some of the questions that came in through the Q&A function here. The first is in regards to the share buyback. So, I know last week you guys put out an 8-K that you increased your share repurchase program to $300 million. But in terms of how you look at the buyback, I mean, do you treat that opportunistically, or are you only looking to buy at certain levels? Or, you know, like, how do you guys go about the decision-making process in terms of the share repurchase program?
Yeah. So I'll first start with just talking about our capital allocation strategy. The first part of this obviously is to ensure that we have adequate capital to fund the organic business. But right after that, our next priority is M&A. We think we have a huge opportunity to continue to put dollars to work that will create shareholder value for us in the longer term. We're focused on the fastest-growing areas of the market. Our third priority would be share buybacks.
Now, every year, generally, our strategy is to make sure that we're at the minimum offsetting dilution, there, and then any additional, share buybacks would be looked at opportunistically, a combination of where we think our, our stock is, our uses of capital internally, particularly if there is nothing on the horizon for M&A, and we feel we have, adequate capital to support that, we would, we would funnel this back into, into share repurchases. So that's generally how, how we think about it.
Gotcha. And then when you look at your growth strategy, you know, how do you think about your penetration globally? Have you identified any regions where you think you'd like to expand to?
Yeah. I think our footprint today is in the regions and in the countries that we feel we have the greatest opportunity. I think that there's still a huge opportunity in North America, and if you look generally, I mean, the IT market is huge. And you look at our revenue, still a fairly fragmented market, and you look at our share of wallet in many of these customers, we have huge opportunity to continue to grow in those customers. In our footprint in EMEA, primarily focused kind of in the UK market. But you know, we have presence obviously in UK, in Germany, in Italy, in Spain, et cetera. I think those are all the key markets we would wanna stay into.
In North America, U.S. is, U.S. and Canada are the biggest focus. I think U.S. has a great opportunity, but our strategy there is to go deeper with our existing customer footprint. In the commercial space, customer acquisition is still important because there are, on the lower end of commercial, there's still an acquisition motion that can occur there. But really the greatest opportunity we have is going deeper with our customer- our current customer footprint in the current geographies that we're in.
Understood. Okay. And then, as you touched on, you know, the, there is a lot of fragmentation in the market. The, you know, we do have a question here about the, just the competitive landscape. Specifically, which competitor do you admire, and, and why would that be?
Yeah. I'll bifurcate this a little bit, and it's always a tough question. It's like asking a politician on the debate stage, "Tell me what you admire about your competitor," but you know, I can speak very frankly. I think from an operational standpoint, I think CDW operates very well. And everything I know about how they operate as a company, I think that there's opportunities for us to learn from an operational standpoint. We've put some of that discipline in place over the last couple of years, but I think there's still plenty of room on the operational efficiency side for our company. I think from the services business, you know, if I were to pick a heavyweight in this, I would say that Accenture in the areas that you know, they're...
I would consider them world-class in terms of how they operate their services business. We certainly benchmark our services business against what we know about them in terms of their services business. So those are two that I would comment on.
Right, right. Two great companies, for sure. I guess, you know, last question from me, given the interest, given our time constraints, I should say. You know, as far as, you know, devices, obviously, you know, the devices have, you know, kind of muted demand. I mean, you know, when do you expect demand for devices to improve? I mean, you know, could perhaps the Microsoft decision to stop support for Windows 10 could that be a catalyst? How do you guys think about that?
Yeah. So generally, the way we think about this, this is a when, not an if, type of question. So devices are gonna return. I think if you look at devices, this is the longest time that we've seen the market depressed for this length of time. I think Joyce has commented on that with her long experience from Dell. She also said she's never seen anything this long. So I think there's natural. I think Windows 10 end of life is one. I think the age of the profile of devices that are out there is two. You know, I think AI PCs may not be a direct demand driver, but maybe as a decision point when the portfolio is to be refreshed, whether they go AI-enabled PCs or whether they stick to a more traditional compute.
But I think the demand signals, you know, I think the long-term demand trends are absolutely there. It's a question of when. You know, markets are choppy and volatile and uneven. Pick your word. Everybody's used every word this year. I think that that will continue, but this is a when, not an if comment.
Understood. Well, thank you very much. We're out of time, so certainly appreciate the James and Ryan joining us here at the Sidoti Conference. Thank you also, everyone participating and asking questions as well. So hope everyone has a productive day. Thank you again.
Thanks, everyone.
Take care.