Insight CEO: We've found bottom line balm to soothe Microsoft pain

Dealer titan ups profit forecasts, pesky sales a different matter...

Microsoft’s heftiest enterprise licensing pal Insight Enterprises is now managing the biting fee reductions emanating from Redmond to such an extent that it feels enough comfort to lift bottom line forecasts for 2014.

In contrast, as the reseller titan rolled out Q2 numbers showing revenues stagnation, it pulled down estimates for revenue growth from mid-single down to low single digits due to slower than expected trade in the North America operation.

Group sales for the three months ended June were flat with the same period a year earlier at $1.41bn due to a turnaround in EMEA and a better outing in APAC.

North America sales dipped four per cent to $923.1m; hardware, software and services were down one, eight and seven per cent respectively. Selling, general & admin costs were up five per cent and operating profit fell nine per cent to $30.5m.

In a conference call with analysts, CEO Ken Lamneck said it had sold “a lot more” lower margin maintenance contracts than software licensing and had not “fully participated” in the hardware refresh in kindergarten and primary schools, while missing out on some activity in the XP refresh, saying it has “work to do”.

“We certainly did cede some market share in the hardware space,” he said.

He described mid-market growth as “nice” but told of “softness in spending by large enterprise and public sector clients”. Desktops and notebooks were up but data centre investments by customers were a little “light”.

For the half year, Lamneck said the US and Canada region had not booked the top line growth it initially expected, but had sought to offset this with tighter controls over discretionary costs.

In EMEA, revenues went up six per cent to $446.9m formed by an 18 per cent leap in hardware, flat services sales and a six per cent decline in software. Excluding a helpful currency tailwind net sales increased just one per cent.

Gross profit dipped to 12.6 per cent due to increased mix of hardware sales, severance and restructuring was $215k versus $1.9m net of tax a year ago, and as such operating profit increased 72 per cent $9.8m.

The region “exceeded expectations so far this year, particularly our UK business,” said the CEO, and “these trends are expected to continue” even though customer demand remains “challenging”.

The year-on-year comparison was helped by a challenging 2013 during which Insight made numerous changes to the management team, including a new EMEA president and the UK boss Emma de Sousa returning from maternity leave. Q2 last year was Insight UK’s worst turnout in its history, the company confirmed in the call last night.

“The team has executed very well to mitigate the effects of partner programme changes in the software category and have driven improved sales rep productivity and strong hardware sales,” said Lamneck.

Net sales is APAC grew 13 per cent to $81.8m, or up 16 per cent when excluding the net impact of currency conversions. Operating profit was up 12 per cent to $6.13m.

Microsoft has overhauled the fees coughed to enterprise channel partners, cutting in some areas and adding in others that are cloud-based. Insight has said this will wipe up to $10m to $15m off the bottom line, lower than the $20m it mooted last year.

“We are executing globally against our plans to mitigate partner programme changes in the software category, as a result we are increasing our full year earnings guidance,” the CEO added.

He said Insight modelled the changes against in every existing volume licensing agreement and its remediation efforts… were significant”.

He said the majority of the Microsoft programme changes will occur in the second half of this year. Lamneck added other profitability initiatives helped too including not chasing revenues “for revenue sake”.

Group operating profit was up four per cent for the quarter to $46.4m and net profit climbed three per cent to $27.25m. ®

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