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Insight Reports Smashing Sales, Profits From Public Sector, Notebook Boom

Federal government contract wins and Windows XP refresh activity stoke massive earnings growth and near-record North American sales for the quarter.

Federal government contract wins and continued Windows XP refresh activity allowed Insight Enterprises to deliver massive earnings growth and near-record North American sales.

The Tempe, Ariz.-based company, No. 13 on the CRN 2015 Solution Provider 500, reported that sales for the quarter ended Sept. 30 leapt 13 percent, to $1.34 billion, after factoring out changes in foreign currency exchange rates. That beat analysts' projections of $1.29 billion, according to Seeking Alpha.

Non-GAAP earnings jumped 24.4 percent, from $17.6 million last year to $21.9 million this year, or 59 cents per share, creaming analysts' estimates of 49 cents per share.

[Related: Insight Bolsters App Dev Expertise With BlueMetal Acquisition]

Insight's stock price remained unchanged at $27.54 in after-hours trading Wednesday. The company's financial results were released after the market closed.

The solution provider began pumping up its federal government practice five years ago by adding head count to become more competitive in the NetCents and SEWP bidding process, according to Insight CEO Ken Lamneck.

"Those investments have come to fruition," Lamneck said during the company's earnings call Wednesday.

Public sector business has grown from making up 5 percent to 8 percent of Insight's North American business previously to more than 10 percent today, according to Glynis Bryan, Insight's chief financial officer. The company has also seen increased spending around its state, local and K-12 businesses, Lamneck said.

The horizon is also bright, Lamneck said, as he expects Dell's acquisition of EMC to allow Insight to become more tightly aligned with the storage footprint of both companies. Insight today is tighter with Dell -- the company was selected last week as Dell's National Solution Provider of the Year -- and Lamneck said he thinks it will help once EMC's storage products are brought into the fold.

"We remain optimistic as to how it will play out for us," Lamneck said.

Dell has indicated that things will be business as usual going forward, and Lamneck expects things to continue operating how they are today.

Sales in North America jumped a whopping 15 percent, to $1.02 billion, marking just the second time in company history that Insight's North American revenues exceeded $1 billion, according to Lamneck. From a technology standpoint, notebook refresh, server upgrades and network upgrades drove the growth.

Lamneck said he believes the heightened notebook sales activity is still tied to the April 2014 end of support for Windows XP, but Insight has no expectation that will continue next quarter. Going forward, Lamneck expects Insight's notebook sales to be more in line with what the rest of the channel is seeing.

From a client standpoint, the public sector and large enterprise customers were the reason for most of Insight's success over the past quarter, Lamneck said.

Europe, the Middle East and Africa (EMEA) saw sales grow 6 percent on a constant-currency basis, to $293.6 million. Services led the way, with 12 percent year-over-year revenue growth in constant currency, as both new and existing clients demanded more professional services, Lamneck said.

Software sales in the region climbed 6 percent in constant currency off the strength of Insight's virtualization business. Hardware, meanwhile, ticked up 5 percent, thanks to significant demand from corporate clients for devices, storage and networking products.

Asia-Pacific continues to be a drag on Insight's performance, with sales declining 7 percent on a constant-currency basis, to $26.1 million. Lamneck said Insight is looking to diversify its revenue in the region starting in 2016 by focusing more on cloud, professional services and select hardware areas.

Things aren't looking as rosy going forward, though, as Insight started witnessing a slowdown in hardware bookings among large enterprise clients in North America as well as the culmination of some large, multi-quarter projects, Bryan said.

Insight hopes to drive higher gross margins in the quarters ahead by growing its services business by 25 percent, investing more in sales and technical resources, increasing its mix of small and midsize business clients and maintaining existing hardware margins, Lamneck and Bryan said.

The company expects to take an $8 million gross profit hit this year because of cuts in Microsoft's partner compensation model around cloud sales commissions and Office 365 incentive fees. The impact is in line with Insight's expectations, Bryan said, and lower than the $11 million to $14 million profitability shellacking Insight took from this last year.

The effect of Microsoft's partner program changes should peter out by next year, Bryan said, meaning that Insight should be able to improve its gross margins in the coming quarters.

For the next quarter, Insight expects to have low single-digit revenue growth on earnings of between 56 cents and 61 cents per share. The company expects to grow faster than the market next year, Bryan said, with more specific guidance coming in February.


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