Insight Enterprises

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A multinational technology company focused on digital transformation, IT infrastructure, and supply chain solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Insight Enterprises (NSIT) is a global technology provider that helps businesses accelerate their digital transformation by providing IT hardware, software, and services. The company operates through three main geographic segments: North America, EMEA (Europe, Middle East and Africa), and APAC (Asia-Pacific).

  • Geographic Segmentation:
    • North America: Represents the largest revenue portion. The focus is on the U.S. and Canada.
    • EMEA: Significant part of the business, encompasses Europe, the Middle East, and Africa.
    • APAC: Includes Asia and the Pacific region.
  • Offerings:
    • Hardware: Insight sells products from manufacturers like Dell, HP, Lenovo, and Apple. It includes all types of IT hardware from computers, laptops, and storage to networking equipment, etc.
    • Software: Sells licenses from many software vendors including Microsoft, Adobe, and others. It also offers software solutions for management, security, etc.
    • Services: Provides a wide range of IT services like cloud services, infrastructure solutions, digital workplace solutions, and professional and managed services.

  • Customer Base: Insight’s customer base is diversified across numerous industries, and includes large enterprises, small and medium-sized businesses, as well as government and educational institutions.

  • Competitive Landscape: The IT industry is fiercely competitive, with various players offering similar solutions, like CDW, SHI, and other value-added resellers (VARs). The industry landscape also includes direct manufacturers who sell directly to the customer. There’s also increasing competition from cloud providers and software publishers. It is extremely fragmented.

    • What Sets NSIT Apart?:
      • Global reach: With a presence in North America, EMEA, and APAC, Insight is able to serve global clients.
      • Strong Partnerships: Has strong relationships with vendors like Microsoft and others, which enables them to get better terms for the customer and offer solutions that best fit customer needs.
      • Customer Intimacy: Long relationships with some large companies who require unique solutions.

Financial Performance:

  • Recent Performance:
    • Net sales increased by 4% in the first three months ended September 30, 2024.

    • Gross profit expanded by 180 basis points compared to the prior period.

    • Diluted earnings per share was $1.85 in the third quarter of 2024, up from $1.63 in the same period of 2023.
    • Net sales decreased by 2% in 9M 2024 compared to 9M 2023. This decline was partially offset by an increase in services.
    • EMEA segment had good increases in margins and revenue in 9M 2024
    • APAC decreased 15% year over year in 9M 2024

  • Revenue Trends: Sales in software and cloud solutions are increasing, hardware sales have been decreasing.

  • Profitability: Gross margin has expanded but this is offset by increased operating expenses.

    • Net income margins are relatively low because of the competitive environment and the costs incurred in providing IT services.

    • The effective tax rate for the year ended December 31, 2023 was 25.4%

Financial Health * Balance Sheet Health: The company appears to be in a decent financial position with reasonable levels of debt. The working capital management is important for this business. They had $583 million cash and equivalents, $549 million accounts receivable, and $1.4 billion of inventory as of September 30th, 2024 * There was a $187 million increase in cash and equivalents and restricted cash. * They have an inventory financing facility with a maximum capacity of $755 million. * As of September 30th, 2024 there were no outstanding borrowings on the inventory facility.

 * **Leverage:** Current debt is at around 1.9 billion dollars, up from 1.7 billion at the beginning of the year. Long term debt is around 1 billion dollars. There is also a small amount of other debt liabilities. So leverage is not that high as the company's equity balances the debt well.
  • Cash Flow: Cash provided by operating activities for the 9 months ended September 2024 is $417.7m compared to $159.9 million in the same period of 2023.

Risks to the Moat and Business Resilience:

  • Technological Disruption: Technological advancements can disrupt NSIT’s competitive position by rendering current products and services obsolete. It is always important for a company to stay on top of new technologies to remain relevant.
  • Competitive Industry: NSIT is competing in a very fragmented market. Therefore, price competition could decrease margins and revenue.
  • Vendor Dependence: Insight relies on partnerships with large vendors. A change in these relationships, or a decline in a partner’s offerings, could harm profitability.
  • Economic Cycles: The performance of NSIT is correlated to the general state of the economy. Economic downturns may reduce demand for its products and services. The recent downturn and concerns about the future are a real problem for NSIT as clients could cut spending.
  • Currency Risk: International operations expose the company to exchange rate fluctuations.
  • Acquisitions: NSIT has used acquisitions to grow and to strengthen product and service portfolio. There is always risk in overpaying or the acquisition not doing what was expected and this has the potential to impact future growth.

Moat Rating: 2/5

  • Narrow Moat: NSIT possesses a limited economic moat primarily derived from its extensive and established distribution network. This leads to high customer retention. The company’s strong partnerships also provide some advantage. However, this is not a truly “wide” moat.
  • The company operates in a very competitive IT industry. A large and diversified customer base could make them relatively resilient, but there are always competitors who offer similar products and services.
  • The industry does not appear to allow for durable moats, thus the lack of “strong” pricing power and long-term value generation is likely to persist.
  • There is no strong evidence that the business has a large source of recurring revenue.
  • The company is susceptible to technological disruption, as it may be rendered irrelevant by competitors or the introduction of new technologies.

Understandability: 3 / 5

  • The business model is relatively straightforward to understand: providing and integrating IT products and services, but how it does this can get complex when looking into different geographies and client types.
  • The business’ financial analysis is complicated by frequent restructuring charges, acquisitions, foreign exchange fluctuations, and adjustments for intangibles, requiring in-depth analysis of the financial statements.
  • Valuing companies like NSIT with a mix of hardware, software, and services can become hard due to the varying profitability dynamics of each segment.

Balance Sheet Health: 4 / 5

  • Has a decent liquidity position with cash, cash equivalents, and restricted cash of about 300 million dollars.
  • They have an inventory financing facility for about $755 million, which means they have a decent capacity for funding operations.
  • Debt levels are manageable, and they have the ability to generate free cash flows in excess of their debt payments.
  • Their debt repayment schedule should also be watched in order to determine whether they have enough earnings power to support that.