Thanks everybody for joining today. Hopefully you all got your exercise. We were just talking about how we did 20-plus flights of stairs since the elevators are a disaster at this place. We'll have that on the record.
I thought you guys were just punishing me. It's good to know you were in there with me as well.
Exactly. So I'm Adam Tindle. This is part of my supply chain coverage. Happy to have the team from Insight here this morning, James Morgado, CFO, and Ryan from IR in the audience as well. In terms of our format, just a fireside chat. I'm going to try to keep it a little bit high level and then zone into some particular areas. But if you do have questions, I know it's early. I have my coffee here. Hopefully you've had yours and feel free to raise your hand and ask questions, so thanks for being here, James. Really appreciate it, so maybe we could just start again, high level, overview of the company for those who might be newer to the story, the key value proposition, and maybe just some major product categories, verticals. How do we think about Insight?
Sure, sure. Thanks, Adam. And by the way, thank you for hosting us again. It's always great to see you and the team. Insight is a Fortune 500 technology company. We are U.S. headquartered. We are multinational, as you mentioned. We focus in North America, EMEA and APAC are three segments, with about 70% of our revenue in North America. We have about 15,000 employees globally. Almost half of those are technically based, and that's anything from architecture to application development. We call ourselves a solutions integrator, which we were founded in 1988. So there's been multiple kind of evolutions of the company. The most recent was in 2022, where we outlined at our investor day the solutions integrator strategy, which is effectively combining hardware and software with the extensive services capabilities that I mentioned to drive high ROI outcomes for our customers. Our portfolio is pretty extensive.
There's a portion of our portfolio, of course, that would look like more of an advanced VAR with the modern workplaces and lifecycle services that we would provide there. But we have everything from expertise in Intelligent Edge, cybersecurity, of course. Multi-cloud has been a big investment for us over the last decade or so. And then, of course, data and AI. Data and AI before AI, I guess, was as pervasive as it is now.
Perfect. And then how about the financial profile? Any important financial metrics you'd like to highlight?
Sure, sure. So first, this is a little strange, but we point people to look at gross profit rather than revenue. I don't think we're the only public company that has done that.
You were one of the first, though.
Yeah, we were the first. There's others that have followed suit. And that's because of some of the netting that goes on with software in the cloud space. I don't think revenue is a good indicator. So gross profit is a better indicator. Our gross margin profile is one that we are particularly proud of. If you look, I think in 2022, we were just under 15%. Now we're in excess of 20% from a gross margin standpoint. So strong margin portfolio and momentum. OPEX is one that we are focused on now in terms of operating expense leverage. I think there's some exciting opportunities there as we move forward. The company generates very strong cash flows, particularly over the last several years. Our long-term goal is to have 90% or greater of our net income from a free cash flow basis.
Two of our growth areas, although this year is somewhat unique, which I'm sure you're going to ask me some questions around that, but two of the growth areas that we're focused on is around our core services growth, which we have said our long-term CAGR would be in the 16%-20%, and then our cloud growth, which had the same exact long-term CAGR, so those are two growth areas. I think from the traditional product side of the business, we would see ourselves slightly long-term, slightly greater than the market from a growth standpoint, but core services and cloud would be the two growth areas.
I'm going to go off script for a second because you said something interesting in that, talking about OPEX and the opportunity for OPEX. It's something that I'm kind of noticing across a number of different channel businesses, right? Not just Insight. What do you think is going on in terms of OPEX ratios and the opportunity, I guess, going forward to optimize that? Why is that happening now? And what are the levers to pull going forward?
Yeah. For us in particular, we have kind of always hovered in that. So by the way, just we look at OPEX as a percentage of gross profit. Like I said, as a percentage of revenue is not a good indicator because of the potential fluctuations with revenue. So gross profit would be a more stable metric for us to look at. We're in the low 70s% and traditionally have been in the mid to low 70s% range. We have a goal from a longer-term perspective that we think we can bring that into the lower 60s%. Now, this is not a commitment for next year or the following year necessarily, but from a long-term goal standpoint, we think we can drive that. When I started about four years ago in 2022.
Has it been that long?
Yeah, it's been that long. When I started in 2022, the biggest focus was gross margin. So we saw a huge opportunity to expand that. Now our focus, I think margins are in a good spot. Over time, as the mix of the portfolio changes, I think margins will continue to expand. The biggest opportunity to drive outsized growth from an earnings standpoint is OPEX for us. That has always been, I think that has always been an opportunity. When we weighed our opportunities, I think gross margin was higher. Now we're going to bring that same sort of rigor that we brought to gross margins that we'll bring to operating expenses. I think in particular in the world of AI, it gives a tremendous opportunity to drive operating expense leverage.
We are a global company, so there are some challenges to drive extremely efficient OPEX envelope with a global company like that. But we have tremendous opportunities to look more at our globalization AI process. So that's going to be our focus. That's going to be one of my key focuses as CFO as I've taken the reins.
All right. Good to know. Speaking of some changes in leadership, Joyce, who if she's listening, we love you, Joyce, is.
I didn't tell him to say that, Joyce, if you are listening.
She's retiring, though, so you don't have to kiss the ring necessarily.
True.
So she is retiring. And you've also had some board changes, right? You had a really interesting shareholder and the change there. So if you want to maybe just recap some of the board and management changes and then talk about what the board is focused on in the search and where we are in that process.
Yeah, yeah, certainly, so first, like you mentioned, I'll start with the board. ValueAct was a shareholder activist that entered the stock in 2021, and Alex Baum joined the board at the start of 2022. A very constructive relationship. Having watched that from the very beginning, I always saw a very constructive relationship there. Contributed significantly towards the strategy of the company and helped guide into where we are today. This year, Alex did not run for reelection, and we also had another board member who retired from the board, so we've added two new board members with an extensive services background, which is an indication of how critical services are to our strategy, so really pleased with not only the contributions that ValueAct gave, but also excited about our two new board members this year. Joyce, as you mentioned, has announced her retirement.
Joyce and the board were talking about this for the better part of the year, just in terms of timing. And Joyce would say when she took the reins, she had never expected it to be a decade type of 10 years. She always saw kind of that four to five-year range. And I think the biggest thing is as AI presents a tremendous opportunity for us. Joyce and the board felt that we wanted somebody who would be here again for the long haul and see the transition through on the AI front. So felt it was an appropriate time. We're thinking about doing an investor day next year, and it seemed appropriate just from a natural transition to have Joyce's retirement and new CEO.
What the board is looking for, first, they're targeting to have a new CEO appointed by Q1. Is there in Q1, I should say, is their goal. We'll see. I know they're hard at work at it. They're definitely looking, it's a tough role to fill because it is not just someone who's a channel expert. They also need to bring a lot of expertise in the services business because now more than half of our gross profit is services focused. So they're looking for that kind of unique character that can bring both expertise in the services side as well as the channel side. For us, culture is extremely important. We protect our culture constantly, even from M&A all the way through our daily life. So a key cultural fit is also going to be important.
That makes sense. I want to get into demand trends, and we could maybe go back to some of the strategic stuff here in a second. But just as it relates to current demand, what are you hearing from customers? We're starting to approach year-end. This is typically the time where we get any sort of budget flush and maybe a little bit of a view into how customers are thinking about 2026. There's a lot of fear from investors for all of these businesses, and the stocks have traded down quite a bit on the idea that PCs in particular are going to go through a digestion cycle, and those are going to slow. So would just love to hear kind of comments on what you're hearing from customers in Q4 and then expectations for spending in 2026.
Yeah, yeah. For us, we're seeing, we commented on this, similar trends that we saw in Q3 into Q4. For us, our commercial business in particular has been strong for a good four to six quarters now. We saw the first refresh kind of late last year from a commercial customer standpoint, the first signs of that, and that carried in through the first half. I would say from a device refresh standpoint, I think the commercial customers are further along. We would say it's hard to categorize exactly, but we're probably 60% to three quarters of the way through a refresh cycle. Further along on the commercial space than maybe the enterprise. I think the enterprise, which we have greater exposure to than most other public comparables, I think the enterprise has been a bit of a more elongated cycle. There's multiple factors that have contributed to that.
But I think enterprise is a little more of an elongated cycle. I wouldn't expect a major inflection point in Q4. I think there's always kind of the talk of the budget flush at the end of the year. I'm not quite sure that we would see a massive, at least that was our expectations as we entered the quarter, no major budget flush in Q4.
Yeah, it seems like those days are gone. We talk about this at this conference every year, and it seems to be that same kind of answer. But as far as 2026 intentions, obviously not asking for guidance, but just what you're hearing from customers from a spending standpoint, you think budgets are up, down, flat?
I think budgets are probably up for next year, but I don't think it's a, again, I don't think it's a major inflection point. I think you're going to see some continuations of the trends, but I do think budgets would be up next year. A lot of the enterprise customers in particular have struggled with some of their budgets this year. They've had to redirect some budget flows because of some of the mergers and consolidations in the industry and price increases. And so they've had to deal with some of that this year. And I think those pressures release a bit into next year. I think we will see continuation of an acceleration of AI kind of prototyping as well as early engagement projects. So I think budgets would be up, but I don't think it's going to be a dramatic increase.
And you mentioned price increases. Again, I'm going off script just because this is something that we started to hear yesterday quite a bit at the conference, that some of the vendor partners are kind of in aggregate, meaningfully raising prices or signaling an attempt to raise prices. Obviously, we've got the dynamics in the memory market driving some of that. Maybe just what are you seeing from a price increase standpoint, and what does that mean for a business like Insight?
Yeah, yeah. We definitely are seeing some price increases. Typically, for a company like ours, price increases get passed on to the customer. And so in moderate price increases, we don't see a compression in margin. If there is extreme price increases, then we can see margin compression because the market becomes more competitive for us. And so between us and other competitors, you would see some sort of us absorbing some of those price increases to help our customers. But typically, we don't see margin compression, and those get passed along. As we saw at the start of this year with some of the tariffs, tariff impacts, etc., our margins didn't compress. Market became a little more competitive for us, but the margins didn't compress.
I mean, if I think back to the COVID times and there was a lot of price increases, it was actually a benefit to a number of channel players who are managing inventory properly and doing a good job for customers. So I think actually maybe even be a benefit.
Yeah, it is. And again, in those moderate price increases, it can be a benefit. We see ASPs go up, and we tend to not see an impact to volume. And so we get the benefit of that.
Yep. I'm going to ask one more, and then I'll pause for audience questions. But as we think about 2025 for Insight, it was a year of what we'd say maybe transition. Had some major partner changes that were obviously out of your control that impacted your business broadly. You guys were very transparent about those, which I think investors appreciated getting some visibility. If you just want to maybe recap the changes, the magnitude, and then more importantly, what that means for 2026, because I think some of those things, at least the absence of that headwind, may be an interesting thing for investors to think about.
Yeah. Yeah. You are right. As much as it was a challenge this year, I think the setup for next year is positive. Effectively, it was in the hyperscaler space for us with Microsoft and Google, two of our largest partners. Very strong relationships with both of those partners. That has not changed. That's not the nature of this at all. Really, it was a pivot. They asked us to pivot, which we have a deep exposure to enterprise. They asked us to pivot away from enterprise resale of cloud and focus more on the corporate and mid-market space. Especially in the Microsoft platform, we have a very strong corporate and mid-market growing space, but we obviously had a lot of exposure to enterprise. And so that created a kind of an acute impact in 2025.
I called it out at the beginning of the year, and the impact has remained similar throughout the year. For the full year, we saw a $70 million impact to gross profit. I've commented on this occasionally, but if you translate that to EPS, that's more than $1.50 of EPS. So a pretty substantial kind of acute impact in the year. If you added $70 million to our gross profit numbers and our EPS, this year would look dramatically different. Unfortunately, that is something we've had to deal with. We deal with partner program changes all the time. It's rare for it to be this extensive and this acute in a single year. The vast majority of that $70 million is behind us as we exit this year.
There are some tail effects of this into next year, which won't quite allow us to get into that 16%-20% long-term range goal that we had. But certainly, I think cloud can lead our growth into next year because these are behind us. The interesting thing that has come out of this year, as much as this has been a challenge for us economically, it's galvanized the strategy even more in terms of how critical services are to the portfolio. Because as Google, Microsoft have asked us to pivot away from enterprise, they've asked us to continue to bring our full services portfolio to all of the customers. And so that's where we see the stickiness with the customer leading to other revenue sources, etc. So if anything, it's galvanized the fact that this is an important part. Services are such an important part of our strategy.
So when you say may spill into next year a little bit, does that mean the $70 million, there's an additional above and beyond $70 million for 2025 that goes into 2026, or is this part of the whole $70 million just goes into Q1 and Q2?
No, the $70 million is accrued this year. There's still a little bit of an impact of it next year. And so I think about it more in terms of growth rate. If you look at our cloud business, we are growing actually above our long-term range, above 20%. I think next year we probably don't get into that range, but we're somewhere. Without giving specific guidance, we were like, we probably will be in the teens somewhere from a cloud growth standpoint, so not to where we have been historically. So that gives an indication that there's still somewhat of a tail, but a fraction of the $70 million into next year.
And I guess how are you thinking about guidance broadly? I know that has been the initial guidance for Insight. This is predating your tenure as well, has been a little bit of a challenge, right? Start out with something that seems a little bit more aspirational and then have to cut that throughout the year. You've got kind of a new shot on goal as you think about 2026, what might be similar or different from the guidance approach?
Yeah, it's probably one of the top discussions that we've had this quarter. I will tell you my approach is going to be to be very prudent in the guidance that we give. I don't think, like I've been saying, I don't think there's a massive inflection point as we head into next year in terms of demand, and so my approach will be to be quite prudent and take all of that into consideration. I certainly think next year returns to growth at the top level, but I'll be prudent as I approach the guidance for next year, taking into consideration what's happened over the last several years.
I think investors would definitely appreciate that. Any questions so far? I know we covered a lot of topics. I want to get into AI here in a second, but let me just see if.
What would this discussion be without AI?
You know, exactly. Exactly. Well, let's dive right into it. So one of the things that, again, kind of going off script and talking about some of the things that have happened at the conferences, I've sat in meetings. Some of the AI vendors themselves are beginning to go out to the channel. And I think there's been some public announcements around OpenAI and Accenture and things like that, right? What are you seeing from the AI vendors like that and the potential engagement with Insight, CDW, kind of your more broad channel players? Do you see that as a potential opportunity over time? And when might that potentially materialize?
Yeah, yeah. I think Insight's very fortunate where we're positioned. We have strong relationships, obviously, with Microsoft and Google too, from our viewpoint to the leaders from an AI standpoint. We've always had a very strong relationship with NVIDIA. So when I look at our partner ecosystem, I think we're well positioned. And then I look more broadly just in terms of a multi-cloud environment. Today, it's very focused on public cloud AI. But certainly, in the future, there's going to be a lot of use cases that are closer to the edge, which may change that portfolio, which also gives us. I love how we're positioned from that standpoint too. I would say that when you look at enterprise spending outside of maybe the Fortune 200-300 kind of range, AI hasn't even. The spend really hasn't even started.
So when you look at the vast majority of enterprise and then down into the kind of the corporate and mid-market space, it hasn't. The spend really hasn't started. What we've seen is kind of proof of concepts, a lot of early engagement, but not significant dollars being spent yet. I think that that starts to change next year. But we are still at the very, very early innings of the spend here. I think what most companies are struggling the most with is getting the ROI from this. And that's why we've positioned ourselves even most recently with the Inspire11 acquisition. I know I got some consternation about doing acquisitions given where we are from a stock price standpoint, including your question at the last earnings call, which was a fair question.
But what we really have to do is we have to make sure we're well positioned because this is a wave that is coming. And I think Inspire11 gave us more capabilities around AI. I think it gives us a different engagement level with our customers. The buyers are going to change from a traditional technology buyer in the company to more of a business buyer. You're going to be speaking to CHROs, to CFOs, to heads of customer service, etc., as you think about AI. And for us to be able to capture that wave, we have to be well positioned. And I think that's where we are. We're going to continue to make moves to make sure we're in the right spot in the years to come. But certainly, we haven't seen the beginning of this yet.
Let's touch on cash flow and capital allocation since you mentioned it. Insight, obviously, especially maybe coincidentally as ValueAct got involved, cash flow really, really improved. I'm not sure if that was something that they helped to drive, but we saw kind of almost above trend cash flow. And I think you guys were clear that those trends were maybe not quite as sustainable, right? How do you think about really sort of a normalized run rate of cash flow? And then if you can tie that into capital allocation priorities.
Yeah. Yeah, I think our goal still stands with 90% or greater, what I would emphasize, the or greater, from a net income to free cash flow conversion. I think that's a more stable. Certainly, cash flow has been very strong the last couple of years. Difficult to, I know I've gotten this question from investors, difficult to model on a quarter-by-quarter basis. But when you look at a long-term trend, I think that 90%, greater than 90% is a good way to look at it.
What drove that? Sorry to interrupt because I know you want to get into capital allocation, but what drove that period of very strong cash flow? Because before that, I mean, we'd have years where there was like cash use even, you know what I mean? So what did you put in place and why is that sustainable?
Yeah, I think there's two parts that I think what we drove internally, we've been tighter on our credit terms, etc. So we've been smart about how we've been managing cash flow. But the real big factor of that was more of what's happened in the hardware, specifically devices. As devices shrinks or grow slower than the rest of the business, we usually have a release of cash because the terms with our device partners is typically shorter than what we have to pay than what we collect from our customers. And so when devices are in rapid growth, you'll see a retraction of cash flow. When devices are in decline, you'll see an increase of cash flow. That's been one of the bigger impacts over the last couple of years. We're sort of normalizing into more of a stable range this year.
And that's, I think, especially as our services business grows and becomes a larger part of our total revenue, you will see that more and more normalize in that kind of greater than 90% range. From a capital allocation standpoint, M&A is still the number one use of capital for us when I look at this over a longer period of time. Again, we have to balance driving the long-term.
It's killing me.
So I'll round out the answer. But when I look at this long-term, I still have to, I still think from a capital allocation standpoint to drive the long-term value of the company, M&A is still critical. In the shorter term, I think share repurchases can take priority. And if I look at this year overall, I know all of it hasn't been a direct, like we're announcing a share buyback, but I've used a lot of cash this year in terms of settling warrants at the end of the year, which had the same effect of reducing share accounts. We've done share repurchases this year. If you look at the last couple of years, we've done a pretty hefty amount into share buybacks. The way I've been answering this is I'm certainly aware of where our stock price is today.
And we've always said that we would opportunistically buy back shares. And I think where the stock is right now definitely presents an opportunity. So I'll kind of leave it at that. But I'm certainly aware of where the stock price is.
You mentioned the warrants. Obviously, it's something that also predates you, but the convert and some of the state of the balance sheet, just maybe recap some of those moves and where we're at now from a capital structure standpoint.
Yeah, yeah. So we had the convert that we issued a handful of years ago. This year, we haven't refreshed that convert. We're letting it go to term. We've settled the vast majority of everything that's been associated with it. There are still some warrants that are outstanding, which a very small portion that we'll settle with shares through the remainder of this year. As we exit this year, there will be no remnant effects from the convert or the warrants. We issued a high-yield bond last year as kind of our inaugural public debt offering. I think that went spectacularly well. Bondholders are always asking me if I'm going to do more on that side. Most of our working capital is done through our ABL, so our asset-based lending facility that we have. And that's the primary use, balanced with the high yield that we issued last year.
Yep. Obviously, it gets a lot cleaner going into 2026. The partner program changes largely behind us, the convert. It's interesting.
I'm looking forward to it.
Yeah.
This has been a tough first year as a CFO, first right at the beginning dealing with tariffs, partner program changes. It's been an interesting year. I'm looking forward to the good setup for next year.
Exactly. Well, with that, do you want to maybe just provide some closing thoughts for investors who maybe are newer to the story? And we covered a lot of ground here. If you were to boil it down, what's the key message that you want investors to walk away from today?
Yeah, I think the key is I think we're very well positioned. If I look at our relationships with our partners, I look at where we're focused at from a customer standpoint, and especially in that corporate and mid-market space, they're going to need significant help, especially as they drive their own digital transformations with AI. I think a tremendous opportunity. I love where we're positioned from a gross margin standpoint, our ability to generate cash flow fuels the business into the future. So I think we're well positioned and I'm excited for the setup for next year.
Sounds good. James, we'll leave it there. Thank you so much.
Thank you Adam.