Q&A: Insight CEO On The K-12 Market, Microsoft And Revival Of The PC

Insight Into Insight

In its last financial report, Insight reported flat earnings but a 9 percent rise in non-GAAP earnings and said it expects growth down the road for the $5.1 billion solution provider, No. 14 on CRN's Solution Provider 500 list. After the earnings call, Insight CEO Ken Lamneck sat down with CRN to discuss the company's push into the wildly growing K-12 market, the multimillion-dollar impact of changes to Microsoft's partner program and the company's hardware sales. Here's what Lamneck had to say.

What's been the most exciting piece of growth for you over the past few months?

Earnings increased 9 percent. Earnings per share increased 9 percent. That's pretty positive. So, we delivered for the quarter.

We're seeing really good execution in our European business as well as our Asia-Pacific business. As we pointed out in our call, there are big opportunities for growth in K-12. That market is growing very rapidly, so we've got initiatives to try and take advantage of that.

You've been talking about seeing the education market as a huge area of growth and looking to push into the vertical more. Why did Insight hold back so long?

It's an area that we had broken out as a separate vertical. We started the process about three quarters ago and it takes time, obviously, to ramp and make sure you've got the right solutions in place and then you've got the right people educated on our side of it for those clients. That's just an ability process we are going through at this stage.

Is Insight building investments into any particular service sets or technologies?

There are some very specific issues that [the K-12 market is] focused on. Of course, a lot of them need the devices, from notebooks and tablets. They need a lot of assistance around the network and making sure all of their students have access. We've launched a site called Insight On Education recently and we all participated last month in a ... technology education conference. That was great because we had a chance to meet with hundreds of key education stakeholders in the industry. We've dedicated a lot of specialists in these past two quarters around education as well.

What other verticals does Insight see a lot of growth potential in?

The verticals that we're doing really well in are around the service providers and hosters. That's all part of the whole evolution toward the cloud. Health care continues to grow. We've invested in that over two years and we'll continue to invest in that as well.

Will Insight be pushing into verticals other than K-12?

It's K-12. We'll continue to invest in health care and then also then continue to invest in the service providers because those are important segments in the industry so we don't want to just stop where we are in those two, even though we see the growth. We'll continue to invest there.

What will your investments be in other verticals? Can you provide some detail there?

A lot of it is making sure we've got the right talented sales team and technical people to support them, as well as making sure we've got the right services offering that these client sets need. That's really an investment in the people that can really help drive the initial sales, provide the technical solutions orientation and delivery pieces.

What about strategic product categories for Insight?

A lot of it is around, of course, the data center. People are building out private clouds. They're very focused on what's called converged infrastructure, which, you know, is the combination of the network, the server and the storage. That's coming together. We're obviously continuing to invest there for our technical resources. We're continuing to invest in our services offering to really grow our services footprint over to our client set. That's another area that we'll continue to invest in. Then, overall, just continuing to invest in our general population of salespeople.

Insight's earnings show a drop in services revenue for the company. Can you provide some color behind that?

There's three classifications of services. We've got our technical services, consulting services and managed services. Consulting and managed are actually growing very nicely. Technical services is the biggest portion of it and that's where it’s a little bit lumpy with projects. Those are big projects that we'll do with various companies that will be a McDonald's type of rollout or a rollout with a company called Regis that does all of the SuperCuts franchises. Those involve pretty big projects where we'll deploy people for a period of time to complete an upgrade cycle for them. Of course, that goes away. That doesn't recur. We'll continue to work on how do you replenish those and keep the pipeline strong. We entered a period where there wasn't new pipeline coming in but we've indicated that we think [in the] second half we'll see growth certainly in the services business.

In the earnings, you downgraded your expectations because of the impact of Microsoft's partner program changes. Can you explain that?

Microsoft, you know, changed a lot of the elements of their program since Jan. 1. That's where they provide certain levels of fees and rebates to us for specific activities. They changed those, and obviously they have a big impact on the business. What we have to do is try to remediate, meaning how do we replace that profitability source. It directed us to areas that we wanted to invest more in, such as the cloud, like Office 365 and Azure, and also even specific client sets. Our team was very, very focused in that area and delivered really good results in remediating much of that impact here in the first half.

How did the partner program changes affect your go-to-market and overall strategy?

It certainly requires us to refocus parts of the sales organization to these specific areas. You definitely have to impact your go-to-market to some degree. ... When they talk about trying to pay us more for Office 365 and Azure, we've got to make sure our salespeople are well trained in those areas, first and foremost, to have those conversations with clients. Then we need to inspect that those conversations are occurring and obviously setting goals among the sales teams to make sure that we're driving that way.

Would you say it will ultimately be a good shift for Insight? Or is that yet to be seen?

Anytime the net impact goes down, it gets tougher because what happens, of course, is the current volume of business that you're doing, we still have to do that. We just get paid less for it. That work doesn't go away. Then you can just continue to grow in other areas as an added expense to us because that's where we'll get the increases, but we still have to do the current volume of business that we were doing before, only you get paid less for it.

What about hardware sales? You saw pretty significant growth in hardware sales, what's driving that?

That was primarily in Europe where we saw the 18 percent in growth in hardware. That was driven pretty much across the board. As an industry we're seeing significant growth in the desktop, notebook area. Of course everyone's talked about the "death of the PC" and that certainly hasn't occurred. It's growing very rapidly.

What's the driving force behind rising PC sales? Regular refresh? XP expiration?

I think it's primarily two areas in the U.S .market. It's really around K-12. They're buying a lot of the Chromebooks and other products as well. We've seen huge growth there. Of course, we're still seeing some of the migration from XP to Windows 7 so [when] companies go through that migration [they] will upgrade the PC as well.

What should we keep an eye out for from Insight going forward?

I think [Insight] will continue to execute on the current plan that we have. You'll see us again focus on education, K-12. We actually launched Insight On Education and we actually launched this week Insight On Healthcare. These are basically digital sites for clients to get best-in-class information in these specific industries to make sure that we're really providing them good thought leadership in these areas. That's the intent of both Insight On Education and Insight On Healthcare, which are two of the key verticals we talked about.