Earnings Dip at Insight as Windows Server 2003 Refresh Lags

Many businesses won't leave Windows Server 2003 until a major security breach happens, said Insight Enterprises' CEO, resulting in a slight drop in quarterly profits.

The Tempe, Ariz.-based company, No. 14 on the CRN SP 500, reported that non-GAAP net earnings sunk 2.3 percent on a year-over-year basis, from $11.7 million to $11.5 million, or 29 cents per share, beating analysts' estimates of 27 cents per share.

Sales for the quarter ending March 31 jumped by 6 percent, to $1.22 billion, after factoring out changes in foreign currency exchange rates. This fell short of analysts' projections for revenue of $1.23 billion, according to Seeking Alpha.

[Related: Microsoft Rolls Out Incentives For Server 2003 Upgrade, Cloud Adoption]

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Insight's stock price plummeted 11.2 percent, to $26.11, in after-hours trading Wednesday. The company's financial results were released after the market closed.

"We expected to see a stronger sense of demand from the services side [of Windows Server 2003] as well as on the product side," Insight CEO Ken Lamneck told CRN after the earnings call. "We still think there's more growth to be had here."

Vendor partner and consulting companies concurred with Lamneck's view that the uptick isn't as sharp as all parties involved were anticipating.

"It's not like their environment gets shut down," he said.

The delay in migrating away from Server 2003 -- which Microsoft will stop supporting July 14 -- stems in part from end users underestimating the complexity of upgrading, Lamneck said. Since Server 2003 operates on a 32-bit operating system while more modern servers are on a 64-bit operating system, many of the existing applications will not be easily portable.

"It may be a little bigger than some think," said Lamneck, noting that the end-of-life is also forcing customers to evaluate their storage environment.

The fact that server upgrades will likely extend into the second half of 2015 is not necessarily a bad thing, Lamneck said, since many solution providers lack the service talent to do so many migrations in such a short time frame.

Lamneck doesn't expect that the stragglers will look seriously into migrating until problems start stemming from the lack of security protection.

"If a company does have a security breach because of this, they really open themselves up for a lot of scrutiny," Lamneck told CRN. "When that does occur, I think that really will be the catalyst for many companies to say, 'We're going to make sure we're not the next one.' "

Across all lines of business, Insight saw solid growth just about everywhere. North American sales climbed 5 percent, to $822.7 million; sales in Europe, the Middle East and Africa (EMEA) jumped 6 percent on a constant currency basis, to $354.8 million; and revenue from Asia-Pacific (APAC) increased 3 percent on a constant currency basis, to $42.1 million.

Services led the way, Lamneck said, with a 58 percent jump in year-over-year revenue in EMEA on a constant currency basis because of an expansion in geographies covered and a 28 percent increase in North America, thanks to demand for technical and consulting services.

Hardware sales were up 7 percent in EMEA on a constant currency basis and 3 percent in North America, Lamneck said, as interest in networking, servers and storage products more than offset a decline in desktop and notebook sales.

Software sales increased by 5 percent in North America and 3 percent in EMEA, Lamneck said, with demand for business productivity and security solutions leading the way.

Insight hired 60 new technical salespeople and service account executives during the first quarter, and expects to continue hiring at nearly that pace for the remainder of the year. The new employees are intended to ensure Insight has sufficient front-end technical skills to help its clients, Lamneck told CRN, and will take place primarily in the United States.

For all of 2015, Insight still expects to have low single-digit revenue growth on earnings of between $2.10 and $2.20 per share.