Insight Enterprises Inc

NASDAQ:NSIT

Earnings Call Analysis

Solid Growth Amidst Challenging Environment

In Q2 2024, the company achieved notable milestones despite a choppy demand environment. Gross profit increased by 5% to $453 million, with cloud services contributing significantly by growing 21% to $139 million. The gross margin expanded by 260 basis points to 21%, supported by a favorable mix from cloud and core services. However, higher interest expenses due to acquisitions led to a 4% decline in adjusted diluted EPS to $2.46. For the full year, the company anticipates low double-digit gross profit growth, with adjusted diluted EPS projected between $10.60 and $10.90.

Solid Performance Amid Uncertainty

In Q2, Insight Enterprises delivered a strong performance with a 5% increase in gross profit to $453 million, and a 260 basis points expansion in gross margin to 21%, despite a challenging demand environment. The company also saw a 3% increase in adjusted EBITDA to $141 million and a 60 basis points rise in adjusted EBITDA margin to 6.5%, setting a Q2 record. Joyce Mullen, President and CEO, highlighted the strategic focus on cloud, services, and high-growth market areas, which have been pivotal in driving economic improvements for shareholders. However, higher interest expenses related to acquisitions led to a 4% decline in adjusted diluted EPS for the quarter.

Focus on Cloud and Core Services

Insight’s strategic emphasis on cloud and core services has paid off handsomely. Cloud gross profit surged by 21% to $139 million, while Insight Core Services gross profit grew by 12% to $81 million. This robust growth in higher-margin areas contributed to the overall margin improvement. For the first half of the year, gross profit increased by 8% to $894 million, with a notable 26% spike in cloud gross profit to $256 million and an 18% rise in Insight Core Services gross profit to $156 million. Adjusted EBITDA for the first half climbed 15% to $274 million, and adjusted diluted EPS went up by 11%.

Revenue and Margin Dynamics

Net revenue for Q2 stood at $2.2 billion, marking an 8% decrease driven primarily by declines in hardware and on-premises software sales. However, this was partially offset by increases in cloud and Insight core services. The hardware segment, particularly infrastructure, saw double-digit declines year-over-year. Devices revenue remained flat but showed modest sequential growth. The gross margin improvement was attributed to a higher mix of cloud and core services and enhanced profitability and pricing initiatives in hardware and services.

Strategic Acquisitions and Investments

Insight’s strategic acquisitions, particularly in cloud solutions, have bolstered its capabilities. Notably, SADA Systems, a prominent Google Cloud partner, demonstrated strong operating cash flows, although it underperformed expectations in the first half. Despite this, the company remains optimistic, projecting SADA to be accretive in the second half. Additionally, investments in new growth areas, such as Generative AI solutions, and a commitment to diversity and inclusion, have positioned Insight well for future growth.

Looking Forward: Guidance and Expectations

Looking ahead, Insight Enterprises expects modest improvements in device demand and infrastructure spending in the second half of the year. The company plans to continue managing SG&A expenses diligently and integrating recent acquisitions to drive revenue synergies. For the full year, Insight projects gross profit growth in the low double-digit range and gross margins between 19% and 20%. Adjusted diluted EPS is expected to be between $10.60 and $10.90. With an anticipated interest expense of $60-$62 million, a 26% effective tax rate, and capital expenditures of $35-$40 million, the company remains focused on delivering shareholder value.

Enhanced Liquidity and Share Repurchase

In Q2, Insight generated $46 million in operating cash flow, up from $28 million in the same period last year. For the first half of 2024, operating cash flow reached $293 million, a significant increase from $188 million in the first half of 2023. The company expects full-year cash flow from operations to be at the higher end of the $300-$400 million range. Insight also repurchased 187,000 shares for $35 million in the first half and plans to execute an additional $165 million in share repurchases over the next two months. With a strong cash flow and ample liquidity, the company is well-positioned to continue its strategic investments and share repurchase program.

Earnings Call Transcript 2024-Q2

[Operator]

Hello, and welcome to Insight Enterprises Second Quarter 2024 Operating Results. My name is Kiki, and I will be your call operator today. [Operator Instructions] I will now hand you over to your host, James Morgado, Senior Vice President, Finance and CFO of Insight North America to begin. James, please go ahead.

[James Morgado, executive]

Welcome, everyone, and thank you for joining the Insight Enterprises earnings conference call. Today, we will be discussing the company's operating results for the quarter ended June 30, 2024. I'm James Morgado, Senior Vice President of Finance and CFO of Insight North America. Joining me is Joyce Mullen, President and Chief Executive Officer; and Glynis Bryan, Chief Financial Officer.

If you do not have a copy of the earnings release or the accompanying slide presentation that was posted this morning and filed with the Securities and Exchange Commission on Form 8-K, you'll find it on our website at insight.com under the Investor Relations section.

Today's call, including the question-and-answer period, is being webcast live and can also be accessed via the Investor Relations page of our website at insight.com. An archived copy of the conference call will be available approximately 2 hours after completion of the call and will remain on our website for a limited time.

This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, August 1, 2024. This call is the property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Insight Enterprises is strictly prohibited.

In today's conference call, we will be referring to the non-GAAP financial measures as we discuss the second quarter 2024 financial results. When discussing non-GAAP measures, we will refer to them as adjusted. You'll find a reconciliation of these adjusted measures to our actual GAAP results included in both the press release and the accompanying slide presentation issued earlier today.

Please note that all growth comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. Also, unless highlighted as constant currency, all amounts and growth rates discussed are in U.S. dollar terms. As a reminder, all forward-looking statements that are made during this conference call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in today's press release and in greater detail in our most recently filed periodic reports and subsequent filings with the SEC.

All forward-looking statements are made as of the date of this call, and except as required by law, we undertake no obligation to update any forward-looking statements made on this call, whether as a result of new information, future events or otherwise. With that, I will now turn the call over to Joyce, and if you're following along with the slide presentation, we'll begin on Slide 4. Joyce?

[Joyce Mullen, executive]

Thank you very much, James. Good morning, everyone, and thank you for joining us today. In Q2, we delivered double-digit cloud and core services gross profit growth and expanded gross margin and adjusted EBITDA margin despite a choppy demand environment. Our strategy to focus on solutions for our clients, including cloud, services and the fastest-growing areas of the market, has delivered improved economics to our shareholders.

In addition, the profitability initiatives and the operating expense actions we have taken over the past several quarters have strengthened our foundation and improved resilience of our business. All of these elements are critical to our strategy to become the leading solutions integrator. We have also continued to invest in sales and technical resources as well as new growth areas such as GenAI solutions, which will be critical as demand improves. Here are a few highlights from Q2.

Gross profit grew 5% to $453 million. Gross margin expanded by 260 basis points to 21%. Cloud gross profit increased 21% to $139 million. Insight Core Services gross profit increased 12% to $81 million. Additionally, adjusted EBITDA margin expanded by 60 basis points to 6.5%, a Q2 record. And adjusted EBITDA increased 3% to $141 million. We achieved these results despite an uncertain macro environment and lower-than-expected demand, especially in our product business. We also had higher interest expense related to acquisitions, resulting in a decline in adjusted diluted EPS of 4% in the quarter. Overall, the variability and seasonality of our business is changing as we focus on selling more services and cloud-centric solutions and as the industry shifts towards consumption-based models.

Our first half results are more indicative of our execution and the progress we are making towards our solutions integrator ambitions. Year-to-date through Q2 compared to the prior year period, gross profit grew 8% to $894 million, gross margin expanded by 210 basis points to 19.7%. Cloud gross profit increased 26% to $256 million. Insight Core Services gross profit increased 18% to $156 million. Adjusted EBITDA margin expanded by 90 basis points to 6%. Adjusted EBITDA increased 15% to $274 million, and adjusted diluted EPS was up 11%.

As a reminder, our ambition is to become the leading solutions integrator by integrating hardware, software and services to drive business outcomes for our clients. They need a partner they can trust to navigate these new technologies, and the infrastructure and workplace requirements to help them digitally transform. We are executing against our strategy and making good progress on our initiatives. As a timely example of this, during the global IT outage 2 weeks ago, unrelated to Insight, our team swiftly engaged with impacted clients and implemented recovery plans to minimize downtime and restore operations efficiently. Our team's expertise and quick response were instrumental in guiding our clients through the outage with minimal disruption to their business operations.

Our ability to deliver impactful solutions to our clients relies on our proficiency across diverse technology domains. We have enhanced our services capabilities by acquiring terrific companies with proven expertise in the fastest-growing areas of the market while simultaneously creating new cross-selling opportunities between our organic Insight business and our acquired companies. Here are some examples of how Infocenter and Amdares bolster our capabilities to deliver solutions to our clients.

A major payment processing company recently separated from its parent needed to build an entirely new IT infrastructure in months, not years. As a newly independent company, our client needed to transition to their own instance of ServiceNow, a critical platform for IT service management. Insights Infocenter team first engaged with the client by using a proprietary set of specialized workshops. This led to a phased rollout across all areas of the ServiceNow platform, and we are now planning to provide support through a managed service engagement.

In the 3 months after acquiring Infocenter, we're already deploying our ServiceNow expertise to traditional Insight customers to deliver comprehensive AI-powered solutions for complex transformations in the high-margin enterprise automation market. Here's an example of how Amdares enhances our solutions capabilities in the EMEA region. Through our Amdares acquisition, Insight has become an elite global implementation partner with Stripe. Strike provides a fully integrated suite of financial owned payments products for businesses of all sizes and processed over $1 trillion in payments in 2023.

Our Stripe-certified implementation experts help businesses get the most out of Stripe's full product suite, including billing marketplaces and complex subscription models. This is an example of how we're positioned to handle complex integrations with custom back-end systems. These examples demonstrate the effectiveness of our M&A strategy as we push to become the leading solutions integrator. In our continued commitment to building a diverse and inclusive team, we're proud to announce that Insight has been recognized for a fourth year in a row by Forbes as one of the America's Best Employers for Diversity.

On the partner front, Insight was proud to be recognized by Microsoft for our security solutions. Insight has demonstrated our robust security services, including a security operation center with 24/7 by 365,proactive hunting, monitoring and response capabilities, all built on tight integrations with the Microsoft security platform. While we are executing against our strategy and making good progress on our initiatives, our perspective of the market and the operating environment for the second half of the year remains mixed.

We achieved strong Q1 results, and we are on track through the first half. Demand for devices has improved, but not to the levels we anticipated entering the year. The drivers for a refresh remain the same, though some clients have paused as they manage through the current economic environment and assess new technologies, particularly [ AIPTs ] as part of their future purchases. We expect demand for devices to improve in the second half. Infrastructure demand was down in the first half as our clients deployed products acquired in 2023.

In July, we saw some improvement in demand and expect that the second half will be stronger than the first half of the year. We have enhanced our global services capabilities through our recent acquisitions, and we're seeing increased cross-sell opportunities. And we will continue to prudently manage operating expenses and gross margin with our pricing and profitability initiatives.

I'll now turn the call over to Glynis to share key details on our financial and operating performance in Q2 as well as our outlook for 2024. Glynis?

[Glynis Bryan, executive]

Thank you, Joyce. In Q2, net revenue was $2.2 billion, a decrease of 8% in U.S. dollars and also in constant currency. The decrease was driven by hardware particularly infrastructure and on-prem software, partially offset by an increase in cloud and Insight core services. In Q2, devices were flat and Infrastructure was down double digits year-to-year. Sequentially, devices increased modestly and infrastructure declined slightly. We continue to anticipate a modest second half improvement in devices, and we started to see green shoots and infrastructure demand in July and expect continued improvement throughout the year.

Gross profit increased 5%, reflecting strong cloud and Insight core services growth, partially offset by hardware declines. Gross margin was 21%, an increase of 260 basis points and reflects a higher mix of cloud and Insight core services. In addition, our profitability and pricing initiatives also contributed to higher hardware and services gross margin. Insight Core Services gross profit was $81 million, an increase of 12% and reflects the benefit of our acquisitions. Cloud gross profit was $139 million, an increase of 21%, reflecting higher growth in Infrastructure-as-a-Service and SaaS.

Adjusted SG&A grew 6%, primarily due to acquisitions. Organic adjusted SG&A is down year-to-year based on the operating actions we took last year as we continue to prudently manage spending in the current environment. This resulted in adjusted EBITDA margin expanding 60 basis points to 6.5% and adjusted diluted earnings per share were $2.46, down 4% in U.S. dollars and also in constant currency. The decline was an increase in interest expense from higher debt primarily related to the recent acquisitions. Our most recent acquisitions were structured to include earnouts to share additional value with the sellers in the case of exceptional performance. These earnouts were measured at fair value at the time of the acquisition, and recorded at much lower amounts than the face value of the target earnouts.

The fair value is remeasured each quarter and any changes after the acquisition date are recognized as a gain or loss and included in earnings from operations. Gains are recognized for lower projected performance against earn-out targets, while losses indicate higher-than-expected performance. In Q2, we recognized a gain related to the earnouts of $25 million, which was excluded from our adjusted results. This gain reflects the lower projected performance compared to the earnout targets for SADA and Amdaris.

While we have determined that the earn-outs for exceptional performance will not be achieved, we are very comfortable with the total capital outlay for these deals. We still expect that these deals will be accretive to our performance and will also deliver strong cash flow. Multi-cloud capability continues to be important to our solutions integrator strategy, and SADA is a key component as a recognized award-winning Google Cloud partner. GCP typically contracted as a multiyear contract that ranges from 3 to 5 years. On the U.S. GAAP, revenue is recognized upfront for the full term of the contract and can therefore be lumpy and difficult to forecast.

On the other hand, utilization or consumption of the cloud service by our GCP clients is much more predictable, occurs monthly and flows through operating cash flow. SADA has and continues to demonstrate strong operating cash flows based on this consumption dynamics. To highlight the value of these cash flows, the contract asset value as of June 30, is $209 million with contracts that typically range from 3 to 5 years. This can be used as a proxy for how the service will be consumed over the average contract life. Our valuation of SADA was based on the cash economics of SADA's consumption business model.

SADA's U.S. GAAP performance will be below our original expectations due to a slower start to the sales cycle in the first half as we aligned to Google's updated priorities. We're focusing our attention on expanding services and net new contracts in the mid-market with a more targeted sales motion, and we look forward to growing our partnership. Moving on to cash flow.

In the quarter, we generated $46 million of cash flow from operations compared to $28 million in Q2 of 2023. As a reminder, Q1 cash flow from operations included favorable timing of client receipts versus partner payments that normalized in Q2. Through the first half of 2024, we have generated $293 million in cash flow from operations compared to $188 million in the first half of 2023. We expect that cash flow from operations for 2024 will be at the higher end of our typical $300 million to $400 million range. And to update you on our share repurchase program. In the first half of 2024, we have repurchased approximately 187,000 shares for a total cost of $35 million. We have approximately $165 million remaining under our current stock repurchase program, which we plan to execute over the next 2 months.

Our adjusted return on invested capital for the trailing 12 months ended June 30, 2024, was 17% compared to 15.6% a year ago. This demonstrates good progress towards our long-term goal. In the quarter, we raised $500 million aggregate principal from the sale of senior notes due in 2032. We've used the net proceeds to repay a portion of our ABL. We exited Q2 with long-term debt of $663 million, including the new senior notes and $171 million outstanding under our ABL. Acquisitions are the primary drivers for the increase in debt of $325 million from Q2 of 2023. This was offset by improved operating cash flow performance. At of the end of Q2, we have access to the full $1.8 billion capacity under the ABL facility, of which $1.6 billion was available. We have ample liquidity to meet needs.

Our presentation shows our trailing 12-month performance through Q2 2024 relative to the metrics that we described in our Investor Day in October 2022. We believe we're on track to hit these targets by 2027 as demonstrated by strong starts from cloud gross profit growth of 28%, Core services gross profit growth of 15% and adjusted EBITDA margin of 6.2%, adjusted ROIC of 17% and adjusted free cash flow as a percentage of adjusted net income of 192%.

Based on our experience across the first 2 quarters, this is a very complex year. While many of our clients have been cautious about their spending decisions, we have seen an uptick in demand in our commercial segment and that is typically the first segment to recover for us after a downturn. As we think about the remainder of the year, we have considered the following factors in our guidance. We anticipate cloud will remain strong. Core services will improve despite continued elongated sales cycles.

SADA had a negative impact on adjusted diluted EPS in the first half, and we anticipate that they will be accretive in the second half as the business remains very back-end loaded. We expect hardware to improve modestly in the second half, primarily driven by device refreshes and improved infrastructure spending. We will continue to diligently manage our SG&A and expect SG&A to grow at a slower rate than gross profit. And we plan to utilize our remaining stock repurchase program of approximately $165 million. Considering these factors for the full year, our guidance is as follows: we expect to deliver gross profit growth in the low double-digit range and that our gross margin will be in the 19% to 20% range.

And we continue to believe adjusted diluted earnings per share will be between $10.60 and $10.9. This guidance includes interest expense between $60 million and [ $62 million ], an effective tax rate of 26% for the full year capital expenditures of $35 million to $40 million and an average share count for the full year of 35.1 million shares. This outlook excludes acquisition-related intangible amortization expense of approximately $69 million assumes no acquisition-related or severance and restructuring and transformation expenses and assumes no meaningful change in our debt instruments or the macroeconomic outlook.

I will now turn the call back to Joyce.

[Joyce Mullen, executive]

Thanks, Glynis. In the first half of the year, we delivered positive results in many areas of the business. Cloud and Insight Core services gross profit grew double digits. We saw slight improvements in device demand. Gross margin expanded, reflecting a favorable mix of cloud and Insight core services and benefits from our pricing and profitability initiatives. And we remain disciplined with SG&A management, all of which resulted in strong adjusted EBITDA margin performance. We are focused on integrating and driving revenue synergies with our recent acquisitions as they expand our expertise and capabilities across various geos and increase our relevance to our clients. While demand in our end markets remains choppy, we have made structural improvements and are focused on capturing profitable growth as demand [indiscernible]

I want to thank our teammates for their commitment to our clients, partners and each other, our clients for trusting insight to help them with their transformational journey and our partners for their continued collaboration and support and delivering innovative solutions to our clients.

This concludes my comments, and we will now open the line for your questions.

[Operator]

[Operator Instructions] The first question is from Joseph Cardoso from JPMorgan.

[Joseph Cardoso, analyst]

So first one for me is just on the full year earnings guide quite impressive that you're reiterating here despite what appears to be kind of a tougher operating environment. But I was hoping you can just dive into what's driving your conviction and reiterating at this point, particularly now that the guide implies a much steeper back half of the year? Like what are you seeing as the key drivers in kind of the back half ramp here? And then I have a follow-up.

[Glynis Bryan, executive]

Sure. Okay. Thanks, Joe. Good question. So here's what I would say. In the second half of this year, we're going to have the benefit of a couple of things. One, we have the Infocenter acquisition that's going to help us from an overall services gross margin -- gross profit and gross margin perspective. Two, we have a SADA in the second half of the year. We had talked in Q1 about trying to smooth the SADA business so that we have more -- less seasonality across quarters that did not work out as we had anticipated in Q2. So SADA remains very back-end loaded. It was dilutive in the first half of the year, and it will be accretive we expect it to be accretive in the second half of the year, and that is reflected in the guidance that we have. We also expect that cloud will continue to be strong. That has been a core tenant for us.

We believe that services is going to continue to be strong helped by the acquisitions as well as our organic business. And we are starting to see some green shoots in devices for sure, in terms of our sequential growth and year-over-year starting to see some year-over-year improvement, up single digits on a year-to-date basis. And we're also starting to see some green shoots in infrastructure. As we go through to Q4, the infrastructure comp becomes significantly easier for us ultimately. And we've had the benefit in our results to date, and we think we will continue to have the benefit in our results associated with the SG&A actions that we've taken over the past several months starting in 2023.

We're looking at the acquisitions that we've made and looking to do some consolidations of some functions where they can benefit from infrastructure we already have in place here at Insight. And we think that with that continued SG&A control, that will also help us in the second half of the year. And we are going to be buying back $165 million worth of our stock in the second half of the year.

[Joseph Cardoso, analyst]

Got it. That's very clear. Yes, so maybe we can just touch on the cloud gross profit growth, like moderated the last 2 quarters in a row in terms of the total growth underperforming a bit from what you outlined in the beginning of the year. And it sounds like some of this is being driven by the SADA underperformance a bit. Maybe you can just dive into that more. Like what are you seeing there is different from your expectations earlier than the year or even 90 days ago. And maybe just touch on -- it sounded like you referenced some actions you're trying to take or planning to take to kind of return that performance back on to trajectory. Maybe you can just dive into both of those vectors.

[Joyce Mullen, executive]

Sure. So thanks, Joe. So cloud GP was -- grew double digits, as you know. We remain very confident in our organic cloud business. So in addition to Microsoft and Google, we also have a lot of other publishers in there, Cisco, Adobe, Citrus, et cetera. In the quarter, network-related cloud offerings were more challenged than we expected in the quarter. So anyway, that was a bit of a drag on the overall sort of traditional cloud, public cloud business that you were thinking of. And then we do expect, as Glynis mentioned, significant revenue synergies with SADA and we expect improvement in SADA's overall performance, which will help contribute to improved cloud performance in the back half. So we feel pretty good about our cloud business. But yes, you're right. It was a little bit lighter than I expected in the quarter.

[Glynis Bryan, executive]

[ Joe ], just maybe add on to that, is that a couple of years ago, [indiscernible] in cloud. They dominated the cloud fees that we received. Now it turns out that some of the other partners, Citrix, Cisco...

[Joyce Mullen, executive]

Adobe.

[Glynis Bryan, executive]

Adobe, et cetera, are also becoming bigger players in overall cloud, there's still -- some of all those are still less than Microsoft combined, but they're still actually larger and some of those underperformed in Q2.

[Operator]

The next question is from Matt Sheerin from Stifel.

[Matthew Sheerin, analyst]

Yes. Just another question regarding your guidance for the year, particularly top line. And I appreciate that you don't give top line guidance, but sort of backing into that based on gross profit and OpEx, it looks like you're going to have to grow pretty significantly in the second half. As you said, comps are going to get easier in Q4. But are you expecting the overall revenue to be up for the year and it's not going to be driven primarily by hardware?

[Glynis Bryan, executive]

We do expect that revenue will be up for the year. It's not going to be driven primarily by hardware. It's going to be driven by services and -- well, sorry, probably think about GP and let me rephrase my thinking. Hardware GP will grow in the year, not hugely, low, low single digits. Hardware will grow. We will have some growth in services revenue, and we will have more so the GP contribution from services on the cloud. We don't focus on the revenue side of the equation as much as we do on the GP side.

[Matthew Sheerin, analyst]

Okay. Okay. And just looking at the North America results, our software sales were down pretty significantly sequentially and year-over-year. I know you commented on-prem software sales [ per week ], but could you give us more color with some of that netted down? And how should we think about that? Because I know that's a core part of your business?

[Glynis Bryan, executive]

So it's on-prem software and on-prem software for us is not netted down. It is recorded growth with COGS and then ultimately, GP. And in any given quarter, there are large deals that happen or there could be large deals or multiple medium-sized deals that happened in the quarter that trigger that growth that we saw in Q1 versus what we're seeing in Q2, but there's nothing unique or different about Q2.

[Joyce Mullen, executive]

I would also add to that, Matt. If you look at it for the half, we feel pretty confident in the numbers that we're seeing. If you remember, a quarter, we had a pretty big software deal that impacted us. And we talked about that on the revenue line, not so much on the GP line. But overall, on-prem software for the half is exactly where we expected it to be.

[Matthew Sheerin, analyst]

Got it. I'm sorry, some of that was regarding -- related to that big deal. Okay. And then do you expect that segment to grow in the second half and year-over-year because the comps are going to get tough. My question's on growth.

[Glynis Bryan, executive]

Just on growth. Revenue growth. Matt, that segment is lumpy only because it depends on projects. The software that we sell in each particular quarter, we would envision that there would be some growth there, consistent with what we've had for the half year.

[Matthew Sheerin, analyst]

Okay. And then regarding your international sales that was also down. One of your competitors was commenting about incremental weakness in the U.K., and I know you have decent exposure there. So are you seeing any of that in Europe?

[Glynis Bryan, executive]

I think that our European -- our U.K. business, in particular, did very well. We don't -- we didn't see the same dynamic. We had Amderas, which helped them, of course, but organically, that business also did well from a revenue, GP and EFO perspective. Your question, I guess, for the future that -- as of right now, we're not -- we didn't see weakness in the U.K. in particular in Q2, and we're not envisioning that for the rest of the year.

[Operator]

The next question is from Adam Tindle from Raymond James.

[Adam Tindle, analyst]

Okay. Glynis, I just wanted to maybe take a step back and talk about the guidance. Previously, you were talking about mid- to high teens growth in gross profit dollars for the year. Today with the update, we're talking about low double-digit growth in gross profit dollars for the year. Could you maybe unpack the buckets that drove that adjustment down. And I think really getting to the part of the question, with SADA, we had previously -- have been told us it was about a $200 million of annualized gross profit dollars when you initially acquired it. I believe, correct me if I'm wrong, how would you update that now on your SADA assumption for fiscal '24?

[Glynis Bryan, executive]

Okay. I think the number that you're quoting maybe SADA's full year 2022 number potentially. Okay. Here's what I would say. There is a portion of underperformance associated with SADA that is impacting our overall gross margin growth. We still believe that SADA has been a strategically valuable acquisition and will continue to be a strategically valuable acquisition in terms of our multi-cloud capability. SADA underperformed our expectations in the first half, but we expected they were going to be dilutive in the first half of the year and that they were going to be accretive in the second half of the year. We had some plans with regard to trying to smooth out that seasonality, but those did not come to fruition. So SADA has remained very back-end loaded. And as you remember, it's very back-end loaded to Q4. That is still the case going forward.

We have reduced our expectations with regard to SADA for the remainder of this year, albeit still back-end loaded, and that is reflected in the guidance that we have provided. To date, we have grown GPs at a slower rate than we had envisioned, but we have increased our gross margin more significantly than we had also envisioned. Hence, while we're bringing down our gross profit guide growth, we are increasing the gross margin associated with that from 19%, which we said originally to the 19% to 20% range.

[Joyce Mullen, executive]

And we also have changed our expectations [indiscernible] to our guide because we've also changed our expectations on SG&A spend. So I think originally, we thought SG&A was going to grow faster than gross profit and now it is growing more slowly than gross profit. And a big part of that is because we've rightsized the OpEx associated with SADA given the lower expectations.

[Adam Tindle, analyst]

Yes, that makes sense. I guess you were very prescriptive on the SADA contribution prior to this quarter. I think you started at $0.55 to $0.75 of EPS last quarter, you updated to $0.55 to $0.65 of EPS. So it sounded like you had a very detailed thinking on SADA for the year. I guess maybe under that framework, could you give us an update on how you're thinking about data from an EPS contribution for the year?

[Glynis Bryan, executive]

I can't talk about SADA from an EPS contribution for the year. What I will say is that I don't think we updated it in May. I think the last time we updated, it was in February. But here's what I would say. The dynamics of the soda business have changed somewhat. We're refocusing on the mid-market clients, we were focusing on net new, and we're expanding the services capability that was part of the reason that we acquired SADA to start off with as it relates to GCP and Google Workspace products specifically. All of that is reflected in the guidance range that we are reaffirming of [ 10 60 ] and [ 10 90 ] at the end of this year, we do expect them to perform at a higher rate and be accretive in the second half versus the first half.

[Joyce Mullen, executive]

And just to add on that, I just want to emphasize the point -- the whole goal of -- the whole focus of our SADA acquisition is to expand our multi-cloud capability. Strategically, it is very well aligned with our overall plans, super critical to customers, and we believe it's going to be a major capability for us as GenAI sort of starts becoming more financially impactful. So we really like it. We just have to be nimble enough to adjust to the priorities that Google has for us as a partner, and we're doing that.

[Adam Tindle, analyst]

Got it. Okay. Maybe just changing to a completely different subject. Joyce, you mentioned the global outage in your prepared remarks, and obviously, it sounds like you did a good job of helping customers through that. Just wondering more broadly speaking, now that the month of July is over, how has that impacted your security business, cybersecurity business growth trajectory in the month of July, with the pushouts to closing [ at ] the reevaluations going on. And are you seeing any impact beyond just the cybersecurity business where customers might want to sort of pause and push out other projects beyond cybersecurity.

[Joyce Mullen, executive]

I think it's caused us to have a lot of conversations about the resilience of our customers' environments, which is something we're very happy to do. I don't think we'd see it necessarily in the numbers in July because that would be a really fast turnaround. But we are definitely having different conversations about, as I said, business continuity and resilience across our portfolio. So no financial implications obvious in the July results, but definitely, it's ramped up the focus and the conversations and just the choices that our clients have around how to make sure that their business is set up for success and this is as resilient as possible.

[Operator]

The next question is from Anthony Lebiedzinski from Sidoti & Company LLC.

[Anthony Lebiedzinski, analyst]

So certainly, a lot of discussion about SADA and its performance there. Just wondering, so for the quarter, your gross profit was up 5%. Just wanted to get a better handle on your organic growth. So given the SADA's performance and I guess, as far as the other two smaller acquisitions. Did you guys see actually organic growth actually in gross profit dollars in a quarter? Or maybe if you could just give more specifics in terms of your organic business versus the acquisitions?

[Glynis Bryan, executive]

Without going into details around it, we had organic growth in Q2.

[Joyce Mullen, executive]

And as Glynis said, SADA was decretive. So...

[Glynis Bryan, executive]

Sorry, not at the gross profit line, that was contributed at the gross profit line. They were decretive at the EFO and EBITDA line but they were part of our improvement in gross profit at the at the GP line, but organically, our business also grew. We have had historically over the last year, even with the revenue declines that we have shown. And even without the impact of acquisitions, we have had gross margin expansion associated with just the pricing and profitability initiatives that we've taken. So we've had gross margin expansion around hardware, even that hardware has declined, and we've had gross margin expansion around services as well.

[Anthony Lebiedzinski, analyst]

Got you. Okay. And just a follow-up on the profitability and the pricing initiatives. I mean do you think you have additional opportunities here in the back half? Or do you think you're mostly tapped out of those initiatives?

[Glynis Bryan, executive]

Anthony, what I would say is that I think we do have a little bit of incremental value that we can get out of the pricing and profitability initiatives. But I think more importantly, those initiatives are now foundational. They are structural changes that we made with regard to how we do business, how our salespeople sell in the marketplace, et cetera. So as we return to growth, we think that those foundational or structural changes that we've made around our pricing strategy will be embedded in the business and that we'll see the benefit from that in terms of higher gross profit dollars on the base of higher gross margin that we have. Incrementally, it may -- our gross margin may increase somewhat, but I think the greater value will be as we return to growth and the gross profit dollars that flow through on our base of higher GP -- gross margins, sorry.

[Anthony Lebiedzinski, analyst]

Got you. Okay. And lastly for me. As far as your acquisitions outlook for that? Clearly, you've done a lot of acquisitions over the years, including three deals the last 12 months or so. I mean -- so -- are you focusing on more on absorbing these acquisitions near term? Or should we expect some additional deals here? How are you guys thinking about that?

[Joyce Mullen, executive]

We've been very, very specific about our M&A strategy, and we said we wanted to develop a programmatic M&A strategy that allowed us to add capabilities or augment capabilities in the fastest-growing areas of the market. We're very committed to doing that. We also said that we would be opportunistic about scale acquisitions. So that hasn't changed.

[Operator]

The next question is from Vincent Colicchio from Barrington Research.

[Vincent Colicchio, analyst]

Yes. I'm curious, how your generative AI activities have been evolving on the services side? Are you seeing more work? What does the pipeline look like?

[Joyce Mullen, executive]

Thanks, Vince. Yes. So we are making some investments in GenAI, but I was -- first of all, let me start by saying there's a lot of kicking of tires. There's a lot of POCs. There's a lot of discussion about it. There's a lot of conversations about governance, data readiness and we are seeing some benefit of that in our services business, but it is really small still. So it's not meaningful from a financial point of view yet. But we are excited about the IP we are developing that help clients get to outcomes faster. We are excited about the formula -- or formalizing our offers around how we do assessments and then how we do ongoing sort of managed GenAI, which is going to be, I think, quite important because use case development is quite specific, and it takes time.

And once you do one, you want to do more. So we are formalizing our offer development around that. And then we're also in the process of building a virtual lab that allows us to demo these use cases and hopefully accelerate the adoption with chatbots or summarization tools or whatever. So lots and lots of discussion, lots of activity, mostly POCs, a bit of data preparation work, certainly some governance and policy work, but not meaningful in terms of financial outcomes yet.

[Vincent Colicchio, analyst]

And could you talk to the divergence perhaps of performance across client segments of enterprise, SMB and government.

[Joyce Mullen, executive]

Yes. So our overall -- so our strongest segment is our commercial segment. So think about that as really mid-market and low end of corporate. We saw growth there in Q2, which is encouraging. Generally, the trends have been that we see growth in that segment first, and then that growth sort of expands to include the other segments later. We see -- our public sector business is largely state and local government, and that is we see some improvement in that segment and then enterprise is still a bit challenged, but moving in the right direction. Yes, they're all oven in the right direction. We expect them all to grow for the year.

[Operator]

This is the end of Q&A session. And I'd like to hand over to Joyce Mullen for closing remarks.

[Joyce Mullen, executive]

Thank you all very much again for joining today. We're very excited about the opportunities ahead of us despite sort of this choppy demand environment that we're in, I look forward to sharing our continued [ path ] our journey to becoming the leading solutions integrator. So Kiki, you can now close the call. Thank you.

[Operator]

Thank you. This concludes today's conference call. You may now disconnect your lines.