Hey, good morning, everyone. Welcome to day two of the conference. I'm Joe Cardoso, one of the hardware and networking analysts at JPMorgan. For the first session today, we have the pleasure of hosting the CFO of Insight Enterprises, James Morgado. Thanks, James. Thanks for joining us this morning.
Thanks, Joe. Good to be here.
James, I wanted to start out, I mean, we were just talking before the call, actually, or the conference started, about the macro. Why do we not start there? Maybe, can you just give us an update, like what you're hearing from your customers, how concerned do you think they are around the macro? Do you think, you know, obviously, up until recently, investors were concerned about a recession or a slowdown going into the back half of this year, based on the conversations, the discussions, the orders that you're seeing from your customers? Is there any validity to those concerns?
Yeah. It's a tough question, Joe. You started right out with tough questions. You know, from a macro standpoint, we were just talking about this, it's as if we have lived, you know, two years in the course of a couple of months in terms of how news is driving the cycles. You know, as we think of the second half, first I'll take the recession, then I'll talk a little bit about the customers. As we think of the second half, consensus on recessions have moved a lot. Like they were start of the year in kind of the 25%. Some of the banks have said it could go up to 50% recession in the second half. Now, I think that's all moderating back down based on the news over the weekend with Trump's visit to the Middle East.
As far as we're concerned, I mean, we're still, you know, it's still a lot of uncertainty out there. As we look at the second half, we still see the same sort of dynamics that we outlined in our earnings call. I think the conversations with the customers are similar as well, in terms of them navigating their own uncertainty in the year and the global macro environment. You're probably going to ask me this at some point, but this dovetails into your customer question, which is, last quarter, we landed pretty close to our expectations, as we said, largely on our expectations. Gross profit was a little light, but we more than made up for that. From an SG&A standpoint, it landed at our expectations. Q2 so far with our customers is largely shaping up to what we thought through the first month now.
I'm always cautious, you've heard me say this before, that last year we were, you know, started a quarter that we thought was relatively strong, and then it would deteriorate in month two and month three. I'm always cautious when I say this, but month one has started to our expectations. We're, you know, the customer spending patterns are largely what we would have expected, particularly around the hardware side. The dynamics that we mentioned in Q1 are still continuing to play out into Q2. For me, I take that as encouraging in terms of the quarter starting to what we thought. I think that's, you know, that's a good sign for Q2, but I think there's still a lot of uncertainty as we look at the second half.
No, fair. You brought up an interesting point, so maybe I just quick follow up on it. Like when we compare the trends to last year, where you had the good start to the year and then things deteriorated as we kind of went on, is there anything different about last year? Obviously, this is great that we can look back and kind of point to something maybe, but is there anything different to last year that you would point to that was a major sign that that could happen? Or was it just, you know, all of a sudden customers pulled back on spending, the trend started to shift as you kind of were intra-quarter? Like anything to point to that essentially was more of a one-off situation in terms of visibility? Or is that something, a risk that could occur going forward?
Yeah, I think last year was absolutely around misreads on visibility. Our view of our customers' spending constraints, I think, changed as the year progressed. We had a really strong, you know, kind of banner Q1 last year. That also led into some of the optimism that we took forward for the rest of the year. Obviously had to correct that as the year progressed. This year, we took a much more prudent view of how the year would evolve. You know, I think that there are also certain dynamics in play. If you look specifically at devices, for example, the age of the fleets, I think Windows 10, these are all things that are coming to a quick head in this year. These are better positive signs than maybe what we saw last year.
I think customer conversations have changed a bit as well from last year in terms of, you know, even if we look at the infrastructure space, more dialogue around what a potential buildout would look like. Spending is not there yet, but certainly increased dialogue, which is a positive sign, but still that backdrop of uncertainty. We are going to continue to be prudent for our look for not only in the upcoming quarters, but for the remainder of the year.
No, makes sense. Maybe last macro questions, and I'll combine them too, because I think for you guys it's a little bit more simple. One of the uncertainties is tariffs, obviously. For you guys, it's a little bit of a unique situation in that you kind of pass on that cost to your end customers, but then you still have to deal with rising prices and demand destruction potentially, right? As you think about navigating, obviously, a very unpredictable tariff backdrop, you know, how are you guys helping your customers? Are you guys building inventory? Are you asking distributors to hold on to inventory, obviously priced at lower levels? What are you seeing from a customer side? What is their behavior? Are you seeing essentially any demand pull in from your end customers? Maybe just flush that out between devices and infrastructure.
Yeah, yeah. In terms of helping our customers navigate the tariff situation, we have very strong partner relationships. Our partner management team knows on a vendor-by-vendor basis and product-line-by-product line within each of the vendors exactly how tariffs would impact, both tariffs from most notably China and Mexico, if you look at the supply chains. We have very close relationships and understanding with the partner networks and also what our customers are building out. We can help them identify the potential impacts and help them plan out their budgets for the year. In terms of the impact of tariffs, you're right, we pass on any increases. At least historically, we've seen that dynamic where we've passed on increases to our customers. The real question there becomes, where is the elasticity of demand?
You know, Joyce commented on our earnings call that, you know, at a 10% tariff, specifically around China, we think it does not impact demand. What we see then is typically higher ASPs with no impact to demand. You might see a revenue boost in a case like that. Above that level, generally what we would see is some erosion of demand and then some balance point at some point with, you know, a certain degree of tariffs and then the offset from ASPs to the demand cycle. In terms of pull-ins, we saw a little bit of it in Q1, but nothing that, you know, the backdrop of the current situation, we would not even have called it out typically.
We saw some of it, but we probably saw it a little more maybe in some of the commercial space than we did in the corporate and Enterprise Customer segment, but nothing that was material or of note from our standpoint.
Got it. Maybe just a follow-up there, because similar point I think CDW brought up in terms of what they're seeing, but maybe they saw a little bit more exacerbated pull-in, but they called it out as being more like Chromebooks and related to the education sector. When you guys think about the commercial customers that maybe you're seeing some of that behavior, is it a similar dynamic where maybe they're more price-sensitive, lower-end PC products, like any color around what you're seeing if you could bifurcate that group?
Yeah, that would be, that's the primary reason behind it in terms of sort of betting on where tariffs may go, looking at their own budgets. Like I said, we saw more of it in the commercial space than the corporate and enterprise customers who I think have taken a pretty prudent approach in terms of the tariff situation and maybe a little more wait and see versus a quick reaction. I did not mention this, but, and it was not anything material enough for us to call out on our public call, but we did do some positioning of inventory for our customers as well in anticipation of tariffs being more of a factor throughout the year. We did some of that in Q1. Of course, we are using, you know, our relationships with the distributors to help with this as much as we can for our customers.
Makes sense. Maybe another question on the tariff side is, you know, obviously we went through maybe a comparable dynamic during COVID where, you know, the supply chain got tight. OEM partners started to raise prices to capture some of the increased commodity costs or component costs for themselves. You know, obviously we're seeing potentially a similar dynamic in the tariff backdrop. When we see OEM partners do that historically, they hold on to those price increases, right? Is there anything different about the behavior during this tariff backdrop that you think with a change, the prices will reflect the change if the tariffs were to be removed?
Yeah.
Like, I guess similar to that dynamic where Amazon essentially talked about calling out, like, here's the increase on the tariff side. Is that how they're handling it? Or should we think about it as being kind of more in that historical context where once the price increases through, even if we go back to a normal state, that price will remain at that elevated level?
What we saw in Q1 was going to be different from partner to partner and how they were treating the potential price increases. Generally, what we saw is most of the partners were going to honor any of the pricing that was currently in any of the orders that they had out there in any of the bookings that they had. Again, it was different from partner to partner, but generally the theme was that for a certain period of time they would honor the quotes. From there on out, the tariff increase would be passed on. Communication was pretty strong, at least with us, in terms of knowing what each of the partners were going to do. They had to scramble, obviously, to assess the situation and quickly determine what they were going to do with the tariffs.
Yeah, generally it was hold the prices for the shorter term for any open orders and any open bookings and then pass on prices into the future beyond that.
Got it. Okay, maybe taking a step back from the macro stuff.
No more tariffs.
Yeah, I'll stop it from there. I won't torture you anymore. Maybe taking a step back, and maybe this is a good springboard in terms of talking about the Insight story. Obviously, a lot of channel partners in the ecosystem, particularly in the U.S., a lot of large ones as well, including yourselves. You know, obviously there was discussion going to the back half of the year around an increasing competitive landscape that maybe was more sentiment than it was actual tangibility to it. I think that's a good starting point in the sense of like what differentiates Insight versus some of your peers in this space. Are you seeing an intensifying competitive landscape?
I think a lot of people are pointing to some of the acquisitions that some of your peers have done in recent times that are gearing more towards where your sweet spot has been historically. Maybe just flush that out in terms of what differentiates Insight and how you're seeing the competitive landscape evolving.
Yeah, I'll take that as flattery, by the way, in terms of our strategy being on point if others are willing to copy it. Yeah, you know, our full solutions portfolio is honestly what differentiates us. And this was not something that Insight just started, you know, when Joyce joined or Joyce became CEO in 2022. It was built by Ken, our previous CEO, and Glynis, our previous CFO, for many years in terms of diversifying our portfolio. I love what we have to offer in terms of anything from endpoint on the devices side all the way through to the infrastructure side on the hardware piece and hardware and software. Our cloud portfolio is strong as ever despite the fact of, you know, the partner program changes, which I'm certain you're going to ask me about at some point.
Our cloud portfolio is as strong as it's ever been. Then our technical capabilities, and it's only gotten stronger with acquisitions like we've done with Infocenter focused on ServiceNow, Amdaris in EMEA, and, you know, SADA in terms of the Google platform. I love what we have to offer. I love the focus on our services and consulting experience. That spans everything from security all the way through data and AI. It's a pretty impressive portfolio. I think that's what differentiates us. Of course, our relationships with our partners. That's something that we keep at the forefront of everything we do beyond just our customers. It's really important to understand the ecosystem of the partners. It's constantly evolving. There's a lot of new partners that enter the market, especially with AI. There's a lot of new partners that are entering.
I, you know, we are really good at identifying those partners that might drive the next wave. Hence acquisitions like in the ServiceNow space. Love what we have to play, what we have to offer our customers in terms of that.
No, makes sense. One of the other areas that I think most investors probably do not appreciate that differentiates a lot of the channel partners is the underlying customers that you guys are really towards or biased towards. One, I guess first part of this question, maybe touch on in terms of your end customer vertical exposure, how you are a little bit differentiated versus one of your peers like CDW or somebody else in the ecosystem in terms of where you are more biased towards. The second part of this question is what are the spending trends that you are seeing across those customer verticals, where you are seeing strength, pockets of weakness, etc.
Yeah, so we have a corporate and enterprise segment, which is the largest segment for us. We have a commercial segment. For us, commercial does not start at small. It's above small. So we typically call it 150 people or larger. It's typically larger than that. But that's our second segment. Our third segment is around public sector. That's our smallest segment. We have greater exposure in the U.S. in public sector than we do globally. Within public sector, less exposure to federal than we do to state, local, and education side. As far as customer spending patterns, I'll take commercial first. Commercial has, we've had four quarters of growth in the commercial segment now. You know, four quarters ago was really small and it's starting to pick up some pace in terms of growth. I think those trends are continuing as we look in Q2.
Commercial seems to be the segment that recovers first. Historically, that's the case. In a downturn, we usually see commercial recover first. That usually moves up segment into corporate and enterprise. Corporate and enterprise spending, specifically more enterprise spending, has been constrained the longest. Corporate was also constrained and it hasn't significantly turned. We are starting to see an uptick with our corporate customers. Enterprise is still slow. We would expect that to recover as the year continues. In terms of public, because of our lower exposure to federal, overall numbers were not as impacted. Certainly within our public sector, that piece impacted us. There was an interesting dynamic just as DoE was doing its work. There was a lockup of funding that impacted education as well, which we have greater exposure on the education side in public.
That had some impact to us in Q1.
Makes sense. The other one that I wanted to focus on was kind of the dynamic and kind of the enterprise versus commercial space. Obviously, on the enterprise side, you called out last earnings around large deals being delayed. Yeah, I guess one, can you just flesh out how prevalent that was across your customer base? Is it more just associated with, random number, but like three customers essentially, or is it more broad based? The second part of this question is if we were to strip out those delays in large projects, is that more reflecting the trends that you're seeing in the commercial bucket in the sense that you're seeing more, you know, momentum in the sense of spending and it improving on more of a sequential basis?
Yeah, so it wasn't just two or three customers. It was a little more broad based in the enterprise space. You know, I would expect that that trend is going to continue in Q2. As the quarter progresses, I would assume some sort of pickup in the enterprise, but not in any way that would majorly turn that segment. I think as the year progresses, the dialogue with those customers has increased. So a lot more, you know, discussion around buildouts, deployments, etc. with the enterprise customers, which is a good sign just in terms of, you know, a potential pickup in demand there. They're still pretty cautious about their budgets. Generally a pickup in conversations, but not necessarily a pickup in demand yet on the enterprise space in any major inflection point, at least in Q2.
We'd start to see that turn, I think, in Q3 and Q4 just based on the dialogue. It is volatile and uncertain. Those conversations could turn into further delays. At this point, we think that it is on a good track, at least to support the guidance that we have out there.
Got it. And then as we think about.
Sorry, Judge, did I miss any other part of that question?
No, I think you covered it.
Okay, good.
When we think about the growth that you're seeing or the four quarters of growth that you saw in the commercial space, first part of the question is, you know, how much of that is that customer vertical is biased towards PCs versus maybe the infrastructure where there's more of that pausing and delaying behavior going on? Then I'll save the second part of the question as a follow-up.
Yeah, on the commercial side, we've seen it more on the device, the device pickup more than we have in the infrastructure side. A little bit of an improvement there, but we're seeing the device side, you know, decent growth on the commercial basis. And that's the bigger driver for our commercial business right now.
Got it. As we think about, obviously PCs has been one of the areas of strength across the channel, but particularly for you guys as well. You know, maybe just provide us an update in terms of what you're seeing across the PC refresh cycle. You know, is this largely associated with your end customers just refreshing their install base? Is this the Windows 10 end of life that we're finally seeing being more of a material driver? You know, are you seeing AI PCs enter the ecosystem as well? Help us think about the drivers that's, you know, essentially being a catalyst for your customers to actually start the spending. How are you thinking about the cycle in terms of, you know, what ending where essentially are for you guys? I think, you know, we're getting close to that end of life time period.
I think it's October when you guys think about, do you think the entire install base is going to refresh by that time frame? Because that would be a pretty tight period of time. How are you thinking about the longevity of the refresh cycle, I guess?
In terms of the drivers first, I do not think AI PCs are the driver. They are certainly a choice point for customers as they refresh. I do not think that in and of itself is a driver. I think the two biggest drivers are around the age of the fleet and then the impending, as you mentioned, Windows 10 end of life. You know, in terms of which dynamic is greater, it is hard to tease those out. Those are certainly, when we talk to our sales teams, the two big drivers. Length of the cycle, you know, I would say in the commercial space, we are maybe in the later, early innings, middle innings on the commercial side, at least with our commercial customers. We call this out at the beginning of the year.
We would expect demand to build on the hardware side as the year progresses. I think commercial still is kind of in that late, early to middle inning space. Corporate and enterprise, from our view, is in the very, very early stages still. As you know, commercial usually leads, and then we'll see corporate and enterprise follow. As the cycle sort of comes to the end, you'll see commercial come first and then corporate and enterprise follow. We would expect that dynamic to play out this year and likely to a certain extent into next year as well, based on the current view, at least on the corporate and enterprise side.
Got it.
In other words, a different way of saying this is we do not expect a massive inflection point in like a Q3 or a Q2 time frame, anything like that.
That brings up like the interesting discussion point around Windows 10 end of life. You know, as you're talking to your customers, I guess what is the willingness if obviously they start refreshing their install base into next year, they're getting past the period in terms of end of life. Are they willing to pay the Microsoft fee associated with that? Is there any noise around Microsoft delaying that payment in terms of prolonging the security features and everything associated with Windows 10? You know, is there any concerns that that can delay the cycle even further if Microsoft does decide to push out? Are you hearing any of that, I guess, at the end of the day?
Yeah, if Microsoft does push it out, I think it would have an impact to the refresh cycle. Probably a little more on the corporate and enterprise space than it would be on the commercial space because some of the commercial refresh has already started. From everything that I hear, the date is going to remain firm. Now, all of this could change instantaneously. Everything that all the information that I get says that it's going to be a firm date. Companies will have a decision to make in terms of are they willing to pay the extended support fees or is it a better choice for them to do their refresh? You know, me as the CFO of Insight, I probably would look more at a refresh if I was in their shoes than pay the fee.
You know, I'm sure as the CFO, I would also go back to see what my flexibility is on extending that. I would certainly explore that option. Everything I hear is that Microsoft is largely going to remain firm on that date.
Makes sense. As you think about the new PC cycle, and I guess the question was originally going to be more biased around AI PCs, but I do not know if we necessarily need to separate it. As you think about this PC refresh cycle versus two, three years ago and the services opportunity that you guys have to wrap around kind of the device delivery, how do you guys feel about your positioning, you know, versus like your historical positioning just given where the portfolio has built out to? Is it, I guess, is it all encompassing around the new PCs that are coming now? Do you see more of an opportunity on the AI PC front? Maybe just walk us through how you are thinking about the services opportunity with the PC refresh.
Yeah, I think the opportunity is the same as it was, whether it's an AI PC or not. I think our services portfolio is the same. And our drive to attach services to everything is the same. We've invested in our Texas. We have a fulfillment and integration center both for infrastructure as well as for devices. We built that out last year or opened it last year. We have, you know, great capabilities there. We certainly have a push on attaching services to all of our hardware. I don't personally see a big differentiator between AI being able to attach services greater with AI PCs than non-AI PCs.
No, got it. Maybe switching gears and focusing on the infrastructure side of the hardware portfolio. I guess here is where trends have been a little bit more sluggish. Maybe if we were to bifurcate the different product categories, you're seeing a little bit of more positivity in certain areas versus others. I guess, you know, what are you attributing the performance that we've seen over the past couple of quarters, years in terms of the sluggish infrastructure spend? You know, obviously part of your outlook is that some of that starts to recover as we kind of progress through the year. What's reinforcing that?
Yeah, infrastructure has been a bit of an interesting thing to watch over the last couple of years. It's also been, everything's been hard to predict. Particularly that area, I would have assumed that we would have seen some sort of refresh or some sort of investments by now. I think there's just been a longer period of digestion than anybody had originally anticipated. I think that's a factor that's in play. I think there's a little bit of this too that, you know, in the networking space, some of this now is in software versus in hardware as well. That's a dynamic that's at play.
You know, as we, what gives us comfort as we look at this year that we're going to see a recovery in infrastructure is really the dialogue with our customers in terms of their own buildout of, you know, data center and investments into workloads and modernizing some workloads. It is really around, it is around those conversations that we're having with our customers, which in, you know, if I play it back over the last 18 months or so, there was not the extent of the conversations that we are now starting to have with our customers. Now, none of those have in a material way really shown up in revenue yet. Networking, if I look at our infrastructure number, networking is the piece that is lagging more than storage and compute. We would expect that to turn in particularly in the second half.
No, makes sense. I guess we'll all be listening to Cisco this evening to figure out if that is the case.
Yeah.
Maybe the other aspect that some folks are contributing to kind of the slower infrastructure spend is a cannibalization of the spend associated with AI. I guess first, are you seeing any of that across your customer base in terms of maybe folks pausing spending there as they kind of figure out what they're going to do with this AI dynamic? The second part of this is obviously, I think a year ago we asked you guys this question in terms of where your customers were on their AI journey. I guess maybe give us an update in terms of where we are. You know, are you starting to see any spending? Are you still in discussion phases? You know, essentially give us an update, a temperature read.
Yeah, you know, if you look across our customer segments, commercial is, I mean, we aren't even seeing really anything in terms of AI on the commercial space generally. You'll see it in AI PCs, for example. If you think about, you know, more modern AI, both on any consulting services that we might provide, there are buildout of workloads either on-prem or in the cloud. We're really not seeing that in the commercial space at all. Really, even if you look at the corporate segment, we aren't seeing it in any material way. Enterprise, the largest enterprises, I think are the ones that are starting to spend on the AI side. Conversations happen across the board and those have increased significantly.
That spans both our what we can do on the infrastructure side as well as what we can do with our consulting services and consulting practices. We are seeing enterprise, and Joyce called this out, we are seeing enterprises reposition their budgets to shift those more into AI as they pause spending in maybe more traditional spaces and start shifting into AI. We are certainly seeing that in the enterprise space and a bit in corporate. The spend really is not there yet. Huge, you know, when I think about this, I think it is a huge opportunity for the future. In this year, I do not think AI is going to be a material contributor to our numbers or our growth. I think it starts to become more material as we get into next year and beyond.
No, makes sense. Let me just pause here and see if there's any questions from the room. Just wait for the mic, please.
Thank you. Thanks for the time this morning. Can I ask a quick question? I think for first quarter, gross profit was down about 8% and you guys are guided for up low single digits for the rest of the year. It implies quite a ramp. How do you sort of, and I think you mentioned sort of the reseller contract or the Microsoft contract, tough comms in Q1 of 2024. I'm curious, how do I disentangle that and say, are you expecting the business to improve dramatically in the remaining three quarters? Or is it just that gross profit would have been up, you know, X percent if you sort of say like normalize for those things? Just trying to understand what is driving that. Is it sort of like these two one time, which we know will change?
Do we expect something to change in the business? Thank you.
Yeah, it's a great question. The biggest factor without any doubt in Q1 in terms of the impact to gross profit was the partner program, the Hyperscaler partner program changes both on Microsoft and Google for us. What we called out is we called out about a $70 million headwind in this year, year- over- year in terms of gross profit with those program changes. That is very heavily weighted towards the first half. By the time we get into Q4, the numbers are largely normalized. There is still a dovetail effect of this into 2026. What I've said before is that it would be on the order of magnitude of anything that we would not call out. It would be in the typical partners change programs all the time as they shift dollars from one space to the other.
That would just be something that we would shift and absorb. You know, really when you look at the Q1 comparis, it's a bit of a false read on the business because of, number one, these partner program changes. Number two, we had an absolutely banner quarter last year in Q1. The comparis also get much easier as the year progresses. Those factors are all in play. You know, for example, cloud in Q1, if I normalize out for the partner program changes, cloud grew at 17%, well within our long-term range of 16%-20%. The underlying business is showing, you know, good improvement that was masked by the partner program changes. It's a great question.
Any other questions in the room? Maybe just piggybacking off of that.
Yeah.
The 17% is obviously pretty strong, excluding the headwinds there. I think actually if you do the implications on the full year guide that you provided, it implies a full year growth rate somewhat below that 17% ex the headwinds. Maybe help bridge the variance there to some degree. Is that 17, like essentially it implies a slower growth as you kind of progress through the year if you do the math on it. Is that more of prudence and conservatism associated with that, just given kind of the broader macro? I guess the root of the question is how sustainable is the 17% underlying growth that you're seeing in one Q? How sustainable is that going forward?
Yeah, I would expect us to, you know, not at the 17% necessarily, but I expect a good cloud number that would probably outpace many others in this space. We have a different revenue recognition policy than Microsoft and Google. You cannot really tie our growth numbers directly to theirs. Because we take revenue upfront, they take theirs over time. You know, I am certainly cautious about putting something out there that says the underlying growth could be 17% for each quarter. I am being prudent in our outlook around cloud. Q2, the partner program changes are still pretty significant. By the time you get to Q4, you will see more of the really underlying number. I would expect, you know, growth in the double digits in cloud absent the partner program changes for the year.
No, makes sense. Maybe you can just, obviously you had the partner program changes. Some of that is associated with your kind of organic Microsoft business in the space. Obviously everyone kind of knows the dynamics, or people close to the story, I shouldn't presume, know the dynamics around SADA. Maybe talk to us, update us on where SADA is. Obviously, there's a lot of kind of realignment that you're doing in that business. Maybe just give us an update on how those things are tracking.
Yeah, so first, our relationship with both Microsoft and Google are as strong as they have ever been. We are in constant dialogue around both of those. You know, in terms of SADA, I absolutely love the pivot that the SADA team has made, both in absorbing these changes, but also really great pivot on their services business, which in the longer term, both our partners and us believe the key differentiator for us will be our services portfolio. In some respects, the changes that we had to absorb with the program changes in SADA has forced us more quickly to focus on services. It was always part of the plan. We thought we were going to have a little more financial room to be able to do that. It forced us to quickly pivot.
Their growth rates on services, albeit on a relatively small base, has been pretty impressive. I'm really proud of what the SADA team has been able to do in a short period of time. They're still focused on the cloud resale. It's a little tougher as they move from they had a really great motion around enterprise as they start building out their motion around the mid-market. It's going to take a little longer, but they're also doing a good job of handling that pivot.
No, that's great to hear. I think we're up on time. Thank you. Thank you for joining us today. Thank you everyone in the room for joining us.
Yeah, thanks. Thanks, Joe. Thank you.
Good morning. I'm Samik Chatterjee, a couple of the hardware and networking companies at JPMorgan. For the next session, I have the pleasure of hosting Ingram Micro. And we have with us Mike Zeller, who's the EVP and Chief Financial Officer. Mike, thank you for coming to the conference. Thank you to the audience as well. Mike, we are starting off every company with a question on the macro. I will do the same with you. It is more just to get your latest thinking on the macro based on the feedback you're getting from your customers. You talk to a lot of customers on a daily basis. Investors are concerned whether we should be thinking of a significant slowdown in the macro in the back half of the year.
Based on what your conversations are like, anything that you can offer in terms of what's your outlook for the back half? How are you planning to run the business given the different scenarios that might play out for the back half?
Yeah, so realizing we just did our earnings last week and we only guide out a quarter. I'll give some flavor on how we see things. We gave some of this in our earnings release as well. You know, as we look at Q2, we're still seeing growth. You know, where our guide is at the midpoint is around mid single digit growth, honestly. What we've seen very, the most robust strength in in the last couple of quarters has been more in the PC desktop notebook category, where we've seen strong double digit growth in Q4 and Q1. Really, we get a lot of questions around, is there pull forward happening in advance of tariffs? It's really very challenging to quantify because remember, we're in a two tier model where we're selling to resellers and ultimately on to end users.
We get directional indications sometimes that some of this might be pull forward efforts. Some of it is just normal investment. We have to remember in that category of products, there was a very long stretch where expectations were for refresh cycle to be happening, but it was happening at low single digits. I think a lot of it is just the spike in the refresh cycle. Some of it is probably a bit of it is pull forward. It is, again, hard to quantify. We really did not see pull forward in any other notable hardware areas, honestly, including inclusive of our advanced solutions area. We have seen strength in servers, cybersecurity, cloud is still strong. We are seeing networking start to rebound into growth, modest growth, but growth, which is nice after some time.
That is sort of how we see Q2 coming as well, albeit we're not assuming strong double-digit growth in that PC category. We're assuming maybe it's, you know, decent single digits for sure. Still a refresh cycle. The big million dollar question to where you're asking is where did tariffs really land? Obviously, there's this respite in place for many countries. We're encouraged to see some deal negotiations happening. U.K. last week, others on the table, China discussions happening. That is all encouraging because certainly certainty will help a lot regardless of where tariffs land. Just knowing the lay of the land will be quite helpful for us. I'm not sure where things land in early July.
If we see a very extensive tariff environment, my biggest concern right now in the market that we are in would be the impact of an inflationary or even recessionary environment more on the SMB space because that's where we make higher profits. That's where we add more value with services attached. The channel brings more value to the end user, customer, and we're compensated for that. That's an area that certainly today is more muted. We see demand, but we're seeing it take longer to close deals. There's deals in the pipeline, discussions happening. There's still intent. I think there's a little bit more of a wait and see environment versus in more of the large enterprise, what we call national service providers in the U.S., as an example, that's been very nice growth. That tends to be a lower margin business for us.
Maybe the same thing that you referred to in terms of SMB versus the larger customers, if you can sort of offer the same perspective, if we were to see a slowdown, some pullback in enterprise budgets, how do you think about the different product categories when you go through like client devices, networking, server, storage? Like how are you thinking about resilience in the demand for those categories?
I mean, I think we've been through a, you know, a softer cycle, generally speaking, for the last year plus. In networking was a very unique circumstance where 2022 we had all the supply constraints on chips that came back into the flow in 2023. 2023 was a record year for growth for networking in many respects. Then we had that compare in 2024 that was very challenging. That's why I'm encouraged that that returns back to growth. There is still the Windows end of life. Now there is the ability to extend, but that's a challenging one for corporations to be doing in any extended way. We still believe that end of life at the end of this year is going to continue to drive refresh in that kind of device and systems category.
Across the other areas, there is still quite a bit of pent up demand. Cybersecurity is something that's going to be very resilient through most cycles. You know, it might not grow as robustly in some as others, but it's still going to continue to grow as technology becomes more complex. Technology in general is resilient. You know, if there is a down cycle, automation, as you try to reduce costs, is the best way to move forward. Technology is a pretty resilient area that I'm not overly concerned if we see an inflationary or a recessionary environment that we would see a major downturn, but we may see flattening. I think the areas, again, that would be more sensitive on the customer side are going to be the small, medium sized business where there's just more sensitivity to cost.
Got it. Okay. Just moving on then to more company specific drivers here. You operate in a two tier sort of channel framework. It is always sort of a question from investors in relation to you do compete with other large competitors in the space. What does a distributor really bring in terms of differentiation? You have done well over at least the last couple of years in terms of outperforming the market. Maybe just give us your maybe quick pitch in terms of how does Ingram differentiate relative to the largest competitors in the space? What does the differentiation for a distributor look like to the eventual customer?
I think from our perspective, I think the biggest areas I would point out are, one, our breadth. And that's breadth geographically. For one, we touch 90% of the global population with a base in 57 countries. We service 200+ different countries around the world with our footprint on, you know, a combination of in-country presence and export models. That's inclusive of building and doubling down, honestly, in some of the more emerging markets such as Asia Pacific and Latin America, where we've even purchased some of the businesses of some of our peers as we see more opportunity there over the years. The combination of our APAC and LATAM businesses have now grown to be more than a third of our business, decently over a third in the last quarter, honestly, getting close to 40%.
You know, that presence is important, especially when you think about global vendor relationships and how you work with the global OEMs. That is the other area of breadth. We have more than 1,500 tech vendors that we work with, tech providers of hardware, software, services, and the like. Bringing that together, when you think about what we call advanced solutions, which is more the enterprise grade hardware, software, networking, infrastructure, and then cloud sort of follows along with that. You know, our data shows that on average, six or more different products or services make up the end solution for a customer.
You think about that value prop as well of that breadth and being able to have not just one, but two, three, four different alternatives in a certain category of products that are going to be able to be best suited to build those bespoke solutions. That really is what advanced solutions represents. I would, that's a good segue to a second area, which is we have continued to invest into that advanced solutions and cloud area. We've invested more than $600 million over more than a decade plus into our cloud marketplace to develop a mode to market for everything as moving to as a service and now more and more moving to multi-year deals and the like.
In advanced solutions where via both organic and inorganic investment, we've built capabilities, technical engineering skill sets, pre and post sale support, consultative skill sets, as well as a plethora of other service offerings that really round out that solution. Last but not least, the precursor of the cloud investment is now the basis for the last couple of years building our Xvantage platform, which is our digital go-to-market platform. This is probably the single biggest differentiator, honestly, right now as far as how we are moving faster than peers in building out a true platform company in many ways. The Xvantage platform, the best way I would say to think about this is bringing a B2C experience into a B2B world.
A couple of examples I would say here, if you think about what I said earlier, six or more products or services making up a solution, that's really complex. How do you build pricing on that? How do you deal with different vendor programs, rebates, incentives? We've now automated that. It's automated with a data mesh that lays over our systems. Therefore, it's ERP agnostic. It creates the plugins not only into our capabilities and systems, but also outward into those of our vendors and customers. We've launched an integrations hub in the last couple of quarters, which now in a matter of minutes, customers and vendors can onboard with their CRMs or whatever their systems are seamlessly into Xvantage. That used to take weeks, months, far longer. We're doing that in a matter of minutes now.
We've also launched a number of different large language models and AI and machine learning, more than 300 models embedded in this program, four petabytes of data now overlaying in this data mesh, 32 million lines and counting as far as program code around this. This is real. It's in 20 of our 57 countries in a meaningful way. It's in 20 countries that are larger in size, so a majority of our revenue. You know, we see a lot of stories from others in the industry around things they're doing of a similar ilk, but I think we're quite a bit ahead.
Staying on Xvantage, and I think anyone who's seen a demo of that product would agree it potentially looks like an industry disruption product itself. Like you can be disruptive to the overall traditional way the industry has operated with Xvantage. Do you see competitors trying to sort of copy what you have with Xvantage? On your own front, on a standalone basis, we can see sort of from the anecdotes that you shared, Xvantage is doing well with customers. What are you seeing in terms of revenue synergies as a result of it? When does it become material to both revenue and cost synergy?
Yeah, so I think certainly others are working along similar lines, but I'm a firm believer. I realize I'm biased when I make this statement, but I believe with the investment we made in our cloud marketplace, again, as a baseline on this and now taking this forward. By the way, the cloud marketplace is unified, so it's a single pane of glass. We don't have multiple places where a customer needs to go or a vendor needs to go in the system. I think we're multiple years ahead in many ways as far as what we're doing here. What we've seen first as far as the benefits of this actually have been more cost synergies. There's an example we give pretty frequently. Just in the US alone, we used to take millions of order checks a year, somebody calling up just to understand, okay, where's my product?
That is now with the APIs that we've linked into the OEMs as well as into the common carriers that are carrying that product. It's again bringing more that B2C experience like you or I would all experience if we went on to Amazon and we can tell our order is on a truck and it's going to be there in the next day. That used to take time. It was sales admin kind of time where people are making calls to the vendor, to the carriers, trying to understand. It's a very complex issue to solve, but a very simple problem. If you think about it, that is now automated.
We have found that we have removed more than $200 million of annualized costs out of our business over the last year and a half, roughly, through actions where we knew that, you know, part of that was directed at areas where with the macro environment, it was a business that was struggling a little bit more and we saw the need to take out costs. The beauty of what Xvantage has provided is that we do not need to add those costs back. We can instead reinvest in a more proactive selling motion and not have to deal with some of those back office admin and other needs. Cost synergy is probably the first area. If I point to our last quarter where our FX neutral growth was double digits, close to 11%, I think that is above market growth as well.
I think we're starting to see that we're driving some of the revenue synergies that you just mentioned and ultimately GP synergies as well, which is highly dependent on the mix of the products we sell and the customer mix as well. We're starting to see some of those benefits come through.
Got it. Now, going back to the earnings call, you talked about IDA or the digital assistant. I mean, maybe just outline what that feature and convenience improvement looks like to some of your internal stakeholders as well as customers.
Yeah, so it's intelligent data assist. It's IDA as we call it. And basically this is a sales aid into our selling base, but also ultimately to our customers who are dealing with their end users. It's again AI enabled. It's basically taking predictive capabilities on buying proclivities of the end users. Where are they in their refresh cycles? Where are they in their product cycles? What have they purchased in the past? Where do we see that landing? And proactively prioritizing the selling process. It's again a perfect example where now we can be far more proactive in the selling cycle than reactive. You couple that with automated recommendations that Xvantage brings to the table of coupling different programs, warranties, service packs, other products with a sale.
It's enabling a go-to-market motion that can be far more proactive and consultative rather than reactive as was the case in the past. We are really excited about IDA. It's launched primarily in the U.S, and rolling out more widely, but we have seen significant success with it so far.
Got it. Okay. Great. Moving to some of the product categories, and I know we talked about client devices already and sort of your views in relation to what you're seeing for the refresh cycle there. Maybe if you can sort of comment on, you did mention that 1Q had very robust growth. You're taking a lower growth assumption for 2Q, but is that what you've already started to see as a step down in your orders? I mean, are you just being cautious about potentially there having been a pull-in in 1Q? The maybe second part of that is, have you seen any price increases already being passed through because of tariff to the customer? What has price elasticity of demand from your standpoint looked like?
Yeah, I'd say in April and May, we've seen, well, for April, we saw some similar trends, you know, of more robust growth. We gave some indication of this in our earnings call. May perhaps tempering a little bit. It's still, you know, only halfway through the month at this point. You know, I think it's trending perhaps a little bit more towards the high end, maybe puts us more towards the high end of our guidance if that were to continue, but we'll see how that plays out over the course of the month. We just saw that as more of a prudent thought process aligned to IDC and other metrics that are out there as far as how we see that PC desktop category moving. As far as price increases, we really haven't seen much.
It's, you know, kind of single digit %s, and I'm going to focus with the US on that commentary because sort of the responsive tariffs in other countries are a longer tail, honestly, to see how that really plays out. In the U.S., it's been kind of single digit percentages of our product where we've seen price increases kick in in, you know, relatively modest and manageable ways. We're working proactively with our vendors to understand how they see that playing out in the future depending on where tariffs land. The good news is, I think, and this is actually a benefit of the COVID scenario. I think the OEMs in our space did a tremendous amount coming out of the COVID world of 2020 and 2021 to diversify their manufacturing and sourcing. Now it's all about toggling.
Where is it best for us to source from depending on where that product is going? It is diminishing some of the impact of this. Not all of it, but some of it. So far, not a lot of price increases, and we're working closely to understand how that will follow through as we see the tariff situation stabilize in the coming months.
Got it. Got it. Just to follow up to that, the momentum that you're seeing in client devices, is that constrained to the US or what do the international markets look like in terms of client devices?
It's been fairly similar everywhere. A little bit more tempered in Latin America for probably a variety of reasons, currency and other being the play there. Generally speaking, we're seeing growth in that category around the world.
Got it. Okay. Got it. Moving to the customer cohorts, I mean, you did talk about SMB, but on the call, you had highlighted that you're seeing more resilience in large enterprises and SMBs may be a bit weaker. Like, is that a comment to the US alone or is that a broader global?
I would say similarly, it's probably a little bit more pronounced in the U.S. Some of that is just a function of we tend in the U.S., with a business as the size of our U.S. business, tends to have more of the larger enterprise customers. Maybe a little bit more pronounced in the U.S. and in North America in general, but it is a phenomenon we're seeing everywhere where SMB is just a little bit more muted.
Okay. Good. Moving to discussing AI, and maybe I'll start you off with AI infrastructure first and then move to AI PCs. What is the role? I mean, you are obviously embedding AI in your service itself, but when you think about enterprise adoption of AI infrastructure or AI PCs, what is the role that Ingram plays, particularly given that you sit in a two-tier structure where there's obviously some value capture that a reseller is also looking to do? How do you think about how much of that value on the services side flows through Ingram?
We absolutely see that as a value prop longer term. AI is going to become more proliferated throughout solutions, but it's still early innings, honestly. I think where investment in AI is happening tends to be more in the larger enterprise where there can be a little bit more experimentation around how you build out AI solutions in different ways. We have seen a little bit more there. There's the common question of AI-enabled systems as well. There are systems out there. They tend to be a higher price point and OEMs are putting more and more out that'll serve mid-market, and that becomes intriguing. Perhaps that levels off some of the cyclicality of PC refresh, honestly, on a longer-term basis, even after the Windows end of life comes around as AI-enabled devices become more available and more cost-effective.
It's been, you know, it's early innings as far as real impact on the business. That said, we've continued to invest, and especially in areas like infrastructure that is going to be needed to serve AI solutions. You know, we're seeing investment there for sure into data center, both on-prem, hybrid, and cloud native. We're continuing to build capabilities and consultative skills and, you know, the certifications that come along with it to be able to serve that opportunity of AI in the longer term as we see that mature a little bit.
How does the opportunity look relative to when you think about enterprise versus SMB as two different segments that you're working with? Does the opportunity look different with the SMB than what a large enterprise would offer?
I think the value prop of Ingram will be where you get to, this is more for the SMB side of the equation, where you get to more repeatable solutions that, you know, solve a certain problem that's going to be common to the SMB. There is more work towards that. That is going to be a big value prop. That does not mean SMB would not invest in bespoke solutions as well. They absolutely will, and there is intention there. I think you need to see a little bit more cost-effectiveness and other factors come into play. That is why I say that what we see a little bit more of the investment happening is more in the large enterprise areas where there is more funding, more capital budgets to be looking at opportunities there and to build out bespoke areas. We are playing in that for sure.
Got it. Let me just open it up and see if there are any questions in the room. Otherwise, we can continue. Anything in the audience? Okay. Let me continue here. Maybe one of the questions that used to come up a lot more in context of cloud companies and how they were spending on AI, but is now more relevant going into sort of the enterprise cycle when it comes to AI investment is, do you see AI as an incremental opportunity completely, or do you think as enterprises ramp their AI spending, it will cannibalize some of their traditional infrastructure spending at the same time?
I would see there is absolutely some incrementality to what we would see on AI on the longer term. You know, like I said, right now, it's certainly incremental spending in means of data interchange, security around it, and the infrastructure to support data needs. You know, that's probably where we play in bigger pieces of this. Ultimately, I think AI can solve problems that would potentially cannibalize some expenditure, but more of the expenditure on people and administrative activities that can be automated. Therefore, from our perspective, it's incremental spend as far as how we serve those markets, even if it may be cannibalizing other areas of spend within a company.
Okay. Okay. Fair. There has long been this also concern about enterprises and SMB in particular leveraging more of the public cloud over the long sort of duration. Particularly, how do you think that impacts Ingram's overall sort of long-term outlook?
Honestly, we sell public cloud, we sell hybrid, and we help build out on-prem solutions. Any and all of the above are helpful, honestly, as far as how we build our business. I'm personally a firm believer that hybrid is largely here to stay. You know, I think there's a balancing act between comfort of what goes fully into public cloud versus what companies want to retain. I think everybody's finding a little bit of that hybrid balancing act, honestly. Because of this, you know, infrastructure as a service, the large-scale hyperscalers, I think Azure, I think AWS as examples, among others, GCP and others, those are big growth areas, honestly. That's why our cloud business has continued to grow the way it has. A lot of that's driven by actually infrastructure spend servicing any and all of those solutions.
Got it. Maybe just following up on that, I mean, your cloud business has grown quite robustly, but maybe just give us a bit more granularity in terms of what is the eventual sort of product you're selling or the sort of what are you reselling to the customer? How do you sort of, how do you drive confidence in relation to sustainability of that? More importantly, I think the gross profit contribution of the cloud segment is a lot better than the sort of revenue contribution. Where do you see that going in maybe four or five years for the company?
Yeah, so cloud's grown on average double digits for us for years. In fact, it's not too long ago. I remember when it was triple-digit growth. You know, I think it's, but that's all about the base, honestly. You know, cloud business started with selling operating systems. Think Windows. I need X number of Windows subscriptions to run my business. We still sell a lot of Windows and operating systems, but infrastructure is probably the area where we've seen the more robust growth from a cloud perspective, honestly, as I mentioned a minute or two ago, and has become a bigger share of that business.
To your point on size and scale, you know, from an accounting convention, a lot of the sales of cloud are sold on a net basis as an agent kind of model, and therefore the revenues are only about 1% of our nearly $50 billion in revenues. The cloud gross profit has grown in Q1, as an example, to be 15% of our gross profit. This is meaningfully scaled, very profitable business. There is no inventory, so working capital investment in it tends to average in the low single digits or even zero or negative at times. You can get the sense of why we would invest in that area. It is 15% of our gross profit in Q1. That is up from 13% a year ago. That gives you a sense of how that vector is growing and becoming a decent share of our overall profitability.
Now, there's no reason to believe we wouldn't continue to see a similar kind of growth vector going forward as we move that forward. On the selling motion side of things, if I go back again to my example of six or more products making up an advanced solution, that might be some on-prem hardware in the form of servers or networking kit, but then there's the infrastructure that is sold seamlessly as a solution in that kind of one-stop shop manner, that it's not going to different parts of our business. This is one motion, and that infrastructure or, again, the operating systems or whatever it may be, anything as a service, anything subscription-based that the customer may be seeking as part of that end solution, that's going to all be part of that same selling motion that we've been growing our business around.
Okay. Last couple of questions. One, gross margins, you have expanded nicely through 2023, took a step back in 2024. Maybe just sort of go through what drove the slowdown in the gross margin in 2024, and then do you see that largely as temporary, and do you see more opportunity to expand gross margins?
Yeah, I think it is. I would view it as temporary. I think even in the first part of 2024, margins were growing on a year-over-year basis. It really was more in the latter half of the year and into Q1 where we've seen a little bit of a drop in margins, but it's purely mix, honestly. There are really three factors I would call out from a mix perspective, and then one more discrete item that we talked about quite a bit in our earnings. We have product mix, more client and endpoint solutions. We've sold a lot of mobility devices as well in recent quarters. That's lower margin business. It's customer mix. As I mentioned already, we have more of the large customers where we aren't bringing quite as much of the same value-added solutions, services, and other things to the table.
Some of those sales tend to be more fulfillment mode in many ways versus the SMB being more muted where we, the channel and Ingram as a key part of that, bring that value and that service offering to the table. Thirdly, we've seen far more robust growth in our Asia Pacific market, 23% FX neutral growth in Q1. Asia Pacific as a rule is a lower margin, but lower cost to serve environment. Those three factors as far as mix have driven a bit of margin rate headwind, but margin gross profit dollars have been trending, you know, in a more favorable manner because the top line's been growing quite nicely. On top of that, those are lower cost to serve areas.
We're getting significant leverage on the OpEx side of the equation, and operating margins have been, you know, moving in the right direction in that regard as well. The last thing I would just point out from a more discrete standpoint is we have a very uniquely and hyper-competitive environment in India. India has now grown to be 10% of our business globally. It's a fantastic market. It's one we continue to grow in, but we're seeing behaviors that are pricing behaviors at negative margins on deals, and we're simply not going to participate in those deals. We're going to continue to grow in the areas that are strategic. We're going to continue to bid competitively where it makes sense. We still grew, you know, mid-single digits in our Q1 in our India business despite those factors. We're starting to see that level as we expected.
Those behaviors are subsiding a bit. They're still heightened, but, you know, that it's starting to get better. We see the second half as more normal as we see it today sitting here in mid-May. That is a very unique factor to India. We see a more competitive market generally around the world, and that may impact a bit on pricing or even the terms and conditions and on credit days and things like that that we offer and what others offer into the market. It is pretty nominal, honestly. We operate in a pretty rational industry as a whole. India has just gotten a bit more hyper-competitive on a temporary basis.
Got it. Got it. Does the customer mix, the geography mix of revenue and its impact on margins moderate once your cloud business ramps up further and becomes a larger piece overall? Because that is netted down revenue at high margin, I would assume.
Yeah, yeah. Cloud will still be double-digit margins, you know, very high double-digit margins on that netted down revenue base. But, and so that will always be a boost to profit dollars, I'm sorry, profit margin, I should say, on an ongoing basis. When you do still see, you know, growth of, you know, nearly 15% FX neutral in client and endpoint solutions, that's very robust. Those, you know, that's a sale that tends to be on average, you know, low to mid-single digit kind of gross margins. Again, very low cost to serve. A lot of that's even sold on fulfillment where the inventory does not even cross through our warehouses. That is why you see that leverage on the OpEx side of the equation, but that mix factor is just hard to offset.
Okay. Okay. Got it. No. We've run out of time, so I'll wrap it up there, but thank you for coming to the conference.
Absolutely.
Thank you to the audience as well. Thank you. You can, but maybe on the side. Yeah.
Yeah.
Just to clarify, I think earlier when I talked to you, you mentioned that you felt that the tariffs would have little short-term implication on the industry and geography. This was slightly substantial. The second one, are you seeing any evidence of your OEM vendors sort of recasting their go-to-market strategy in terms of where they want to sell out to based upon the growth?
Not a lot of change on the strategy question, not a lot of change as far as where we're seeing that so far, but we're monitoring that closely as far as how we see the vendors. Even to the first part of your question, I think it's a little bit early days. I think we're seeing, as far as where we're seeing growth, whether it's cloud or in other areas, but certainly it's been more tempered in some of the cloud and advanced solutions areas versus the client and endpoint, which is, again, more systems, smartphones, accessories, and so forth. We can tie, I know we need to yield the room to somebody else. I can catch up. All right. Thank you.