Insight Enterprises: Impact Of $581M PCM Acquisition Just Starting

Insight's third fiscal quarter 2019 saw a temporary dip in hardware sales, and the very beginnings of what could be a long-term impact from a move by vendors to push hardware-as-a-service business models.

Insight Enterprises on Wednesday said the closing in August of its massive PCM acquisition is already starting to have a positive impact on its finances, and is expected to help boost hardware sales going forward.

The post-close look at Insight's $581 million acquisition of PCM came while Tempe, Ariz.-based Insight reported its third fiscal quarter 2019 results during which the company said a temporary dip in hardware sales in North America wasn't enough to slow revenue growth for Insight Enterprises, which said it is seeing increased cloud and services-related sales.

The company also said that it grew gross profits in the quarter, although net GAAP profits were depressed following the closing of its huge PCM acquisition in August.

[Related: The Insight-PCM Deal: 6 Big Things You Need To Know]

Insight Enterprises was ranked number 14 in CRN's 2019 Solution Provider 500 list, while PCM was ranked number 30.

Ken Lamneck, Insight Enterprises president and CEO, told financial analysts on the company's financial conference call that his company is working diligently to integrate PCM's business into that of Insight's to ensure it optimizes the market opportunity of the combined business and deliver its planned $70 million in run rate cost synergies by the end of 2021.

"To date, we have completed the organizational review of the combined senior leadership team, completed of our planning efforts around brand, and finalized our time line for e-commerce and core systems integration," Lamneck said. "We expect to substantially complete the systems integration work by mid-2020."

Glynis Bryan, Insight's chief financial officer, said during the conference call that PCM in September contributed $172 million in net sales, $28 million in gross profit, and about $3 million in earnings from operations, including just over $2 million in intangible amortization expense.

"We will have PCM for the entire quarter in Q4 2019, and expect seasonal top line performance consistent with prior year's PCM," Bryan said.

Insight also continues to pursue strategic merger and acquisition opportunities, Bryan said.

"We have developed a robust framework to guide our M&A decisions, and we have demonstrated the effectiveness of our integration process with past M&A transactions, such as Datalink and Cardinal," she said. "In general, we look for M&A transactions that will be accretive within the first full fiscal year following the acquisition."

When asked about the impact of PCM to Insight's financials going forward, Bryan said that PCM's total revenue includes a smaller percentage related to services than Insight's revenue does, but a higher percentage related to hardware.

"In the fourth quarter, you should see a little bit more hardware associated coming from PCM and not that much impact on our services number going forward because they were smaller services as a percentage of total revenue," she said.

For its third fiscal 2019 quarter, which ended September 30, Insight Enterprises reported total revenue of $1.91 billion, which was up 9 percent from the $1.75 billion the company reported for its third fiscal quarter 2018.

That included a 10-percent year-over-year growth in North American sales to $1.52 billion, a 3-percent increase in EMEA (Europe, Middle East, and Africa) sales to $355.7 million, and a 32-percent increase in APAC (Asia-Pacific) sales to $41.7 million.

Hardware accounted for 67 percent of total sales, down from last year's 69 percent, software accounted for 20 percent, up from last year's 19 percent, and services accounted for 13 percent, up from last year's 12 percent.

The third-quarter results reflect lower hardware sales with a select few large North American enterprise clients, which Lamneck said is compressing the company's growth rate compared to the overall market trends.

"While it may experience cyclical trends with large clients from period to period, our relationship with those clients remain strong, and we expect to return to growth in the hardware category in the fourth quarter," he said.

When asked whether a vendor move towards hardware-as-a-service is starting to impact the market, Lamneck said that Insight is definitely starting to see some impact.

"As the world starts to move more and more towards subscription-as-a-service, certainly in the software front, we're starting to see it also apply itself towards hardware," he said. "So there's some innovative programs in place. I'd still say, it's pretty early innings in that regard from some of the partners that we deal with as far as the traction. We're seeing a good amount, of course, from the storage front. ... There is certainly some of that happening in a pretty strong way there where they're all sort of looking at opportunities to provide choices for clients in order to provide it as-a-service or on premise. So that's definitely a trend, but again, it's still early to give you any kind of real data points yet."

Gross profit for the quarter reached $276.2 million, up 18 percent over last year's $234.9 million.

On a GAAP basis, Insight Enterprises reported net earnings of $27.1 million, or 76 cents per share, down from last year's $32.2 million, or 89 cents per share.

Looking forward, Lamneck said Insight Enterprises expects net sales to increase between 9 percent and 11 percent for its full fiscal year 2019 compared to 2018, which includes results of PCM for the last four months of the year.

The company also expects diluted earnings per share for full year 2019 to be between $5.45 and $5.50, compared to last year's $4.63 per share.