Insight Enterprises Inc

NASDAQ:NSIT

Earnings Call Transcript 2019-Q3

[Operator]

Greetings, and welcome to the Insight Enterprises Third Quarter 2019 Operating Results Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Glynis Bryan. Please go ahead.

[Glynis Bryan, CFO]

Thank you. 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 September 30, 2019. I am Glynis Bryan, Chief Financial Officer of Insight, and joining me is Ken Lamneck, President and Chief Executive Officer. If you do not have a copy of the earnings release that was posted this morning and filed with the Securities and Exchange Commission on Form 8-K, you will find it on our website at insight.com under our Investor Relations section. Today's call, including the question-and-answer period, is being webcast live and can 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, November 6, 2019. This call is the property of the Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of the Insight Enterprises is strictly prohibited.

In today's conference call, we will refer to certain non-GAAP financial measures as we discuss the third quarter 2019 financial results. When referring to these measures in today's call, we will refer to them as adjusted. These measures include adjusted earnings from operations, adjusted diluted earnings per share, adjusted free cash flow and return on invested capital. These adjusted measures include -- exclude intangible, amortization expense, acquisition-related expenses, severance and restructuring expenses and amortization of convertible debt, discount and issuance costs. You will find a reconciliation of these measures to actual GAAP results included in the press release and the accompanying slide presentation issued earlier today.

Also, please note that unless highlighted as constant currency, all amounts and growth rates are discussed in U.S. dollar terms.

Additionally, any reference to our core business, exclude PCM's results subsequent to the acquisition. Finally, let me remind you about forward-looking statements that will be made on today's call. 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 annual report on Form 10-K and reports subsequently filed with the SEC. With that, I will now turn the call over to Ken. And if you're following along with the slide presentation, we will begin on Slide 3. Ken?

[Kenneth Lamneck, President, CEO & Director]

Hello, everyone, and thank you for joining us today to discuss our third quarter 2019 operating results. In the third quarter, we continue to execute against our strategy to deliver IT solutions to our clients globally, leading with services and solutions that drive business outcomes for our clients.

In addition, we closed the PCM acquisition on August 30. In 2 months after the acquisition, we remain excited about the opportunity to drive growth in our expanded client base and footprint.

Now turning to the third quarter results on Slide 4. Consolidated sales were $1.91 billion, up 9% year-over-year, including 1 month of PCM results. Gross profit was $276 million in the third quarter, up twice the rate of sales at 18% year-over-year, including 6% growth in the core business and the addition of PCM. Gross margins were 14.4%, up approximately 100 basis points year-over-year, driven by strong cloud and services growth in the core business and the addition of PCM.

Consolidated selling, general and administrative expenses were $222 million in the third quarter, up 21% year-over-year, including both organic growth of 8% and the addition of PCM. All this led to adjusted earnings from operations of $59 million, an increase of 7% compared to last year's third quarter. On a GAAP basis, earnings from operations decreased 11% to $44 million, driven by approximately $6 million of PCM acquisition-related expenses, $2 million of PCM intangibles amortization expense and integration and restructuring expenses recorded in the quarter.

Adjusted diluted earnings per share was $1.10, an increase of 10% year-over-year. On a GAAP basis, diluted earnings per share was $0.76. Our third quarter results reflect our strategy to improve our gross margins by leveraging our 4 solution areas to optimize our business mix in higher-margin categories, including cloud, solutions and services. This led to 100 basis point improvement in gross margins in the quarter. The core business in North America and EMEA regions grew gross profit dollars mid-single digits year-over-year in constant currency, while the APAC region grew gross profit dollars 21% year-over-year in constant currency. These results were driven by a higher mix of gross profit from services sales including cloud solutions.

Gross profit earned from cloud offerings was 19% of our consolidated gross profits for the trailing 12 months compared to 17% for the same period last year. The improved gross profit performance in the core business in the third quarter, together with the performance of PCM for 1 month led to high-single digit growth and adjusted earnings from operations compared to last year. In addition, we improved our cash flow from operations performance by $90 million year-over-year in the third quarter, bringing the total for the first 9 months of the year to $169 million in the operating cash flow.

We also reported return on invested capital of 14.9%, which includes the impact of acquiring PCM in the third quarter. Demand continues to be solid across key markets where we compete. Our third quarter results reflect lower hardware sales with a select few large enterprise clients in North America, which is causing compression in our growth rate compared to the overall market trends. While it may experience cyclical trends with large clients from period to period, our relationship with those clients remain strong, and we expect to return to growth in the hardware category in the fourth quarter. Our investments in our 4 solution areas, Supply Chain Optimization, Connected Workforce, Cloud and Data Center Transformation and Digital Innovation, have positioned us well to compete -- to continue to compete in the marketplace. We're also very excited about the cross-sell opportunities we see in the mid-market space and the potential to leverage our solution area strategy into the PCM client base to grow our position in this higher-growth, higher-margin end market.

Next on to Slide 5. We closed the PCM acquisition on August 30 and are working diligently to integrate their business into ours to ensure we optimize execution in the market opportunity of the combined business and delivered to our commitment to realize $70 million in run rate cost synergies by the end of 2021. To date, we have completed the organizational review of the combined senior leadership team, completed of our planning efforts around brand and finalized our time line for e-commerce and core systems integration. We expect to be substantially complete the systems integration work by mid-2020. We are also on track to deliver more than half of the expected cost synergies by the end of 2020.

Moving on to Slide 6. Next, I want to highlight an example of how we're leveraging our solution areas to help our clients achieve better business outcomes. Our financial services firm wanted to attract a new generation of customers and transform its customer experience by leveraging the power of artificial intelligence to create a multichannel chatbot. As digital natives, millennials generally preferred the use of social media platforms to connect with family, friends and to track -- and to transact banking and commerce. Our Digital Innovation team helped the client launch a multichannel conversational agent or chatbot with rich capabilities for buying and selling stocks, locating nearby branches, getting quotes and more. Users can ask questions around financial topics and the chatbot is able to provide educational resource in the forms of articles and short videos. By providing seamless access to easily digestible information, the financial services organization has experienced a 72% increase in new accounts among the millennial generation. With the chatbot, customers gained the experience of anytime, anywhere access and quick answers to questions.

On average, it takes a human customer service representative 15 to 20 minutes to answer an inquiry, the chatbot is -- can do this in seconds. This is just one of many examples where our Digital Innovation team is delivering Intelligent Technology Solutions to clients, which have broad application across a variety of client industries.

Moving on to Slide 7. Before I hand the call back over to Glynis, I wanted to take a moment to recap key highlights from our Investor Day event in mid-October. First, I'd like to thank all of you who joined us live for the event. And if you weren't able to make it, please note that there is a replay currently available on our website. At the event, we outlined our long-term strategy and key measurements we intend to use to track our progress. During the event, we noted that we believe our strategic assets give us competitive advantage in the marketplace. In addition, our strategic assets have been integral to our ability to deliver double-digit growth and adjusted EFO and EPS results and more than 700 basis points improvement in our ROIC metric over the last 5 years. They also position us well to continue to drive value in the future. Our strategic assets include: our focus on culture, people and leadership; our innovation-led approach in solutionary expertise; our global reach and scale; our diverse and loyal client and partner relationships; and lastly, our operational vigor and financial health.

We will leverage these strategic assets to achieve our key priorities, which include: continue to innovate in order to capture share in high-growth areas like cloud and the intelligent edge; growing the business through solutions that drive better business outcomes for our clients; expanding the scale in our business and strategic clients in end markets, particularly in the mid-market where the recent acquisition of PCM has added clients and capabilities to our portfolio; and lastly, continue to optimize client experience and our execution through relentless focus and operational excellence.

Next on to Slide 8. To measure our progress against these priorities, we laid our 4 key metrics. We'll seek to go faster than the market, a CAGR over the next 5 years of between 8% and 10%, expand EBITDA margin to between 5% and 5.5%, optimize our return on invested capital to a range of between 19% and 21%, and to continue to grow services gross profit as a percent of total gross profit to between 50% and 52%. We will seek to make progress each year against these goals and will update you during our scheduled earnings calls. I will now hand the call back over to Glynis, to provide more detail on our financial performance in Q3.

[Glynis Bryan, CFO]

Thank you, Ken. I'll start on Slide 10. I'd like to highlight changes we've made to our adjusted earnings from operations, adjusted net earnings and adjusted diluted earnings per share calculations reported today. We have historically excluded severance, restructuring, acquisition-related and onetime costs in our adjusted metrics. Starting in Q3 of 2019, we're excluding the amortization of intangibles from our adjusted results. In the third quarter, we excluded approximately $6 million of amortization expense from our adjusted metrics. In addition, as is customary, our convertible notes were issued at a discount par value to effectively prepay debt issuance costs of proceeds and to the -- to growth of the below market cash coupon on the notes. These amounts will amortize to interest expense and increase the reported convertible debt balance over the life of the note, and we will exclude this noncash interest expense from our adjusted operating results beginning in Q3 and going forward. We believe these changes in presentation will give investors a meaningful comparison of the cash-based operating results period-to-period and will allow for meaningful comparisons to results of our competitors. To ensure comparability, we will make applicable adjustments to prior period results as well.

Moving on to Slide 11 with -- in North America. In North America, net sales were $1.5 billion in the third quarter, up 10% year-over-year. The core business continue to see less spending for hardware products by select few existing clients, which drove the top line down 2% year-over-year. For the combined business, hardware sales increased 7% year-over-year driven by PCM.

Software sales increased 14% year-over-year, and services sales increased 26% year-over-year, in the third quarter, including higher sales of cloud solutions and Insight delivered services primarily in the core business.

Gross profit in North America was up 22% year-over-year, and gross margins improved 130 basis points to 14.4%, reflecting the increased mix of cloud and services sales in the business and a modest contribution from PCM for 1 month of the quarter.

North America selling and administrative expenses increased 27% year-over-year, including a 10% increase in the core business, resulting from significantly higher health care expenses, investments in cloud subscriptions and internally used IT tools and increased headcount in our solution areas. In addition, we added PCM in the month of September. As a result, adjusted earnings from operations increased 10% year-over-year, to $53 million for the quarter.

I'd like to provide some color around PCM and its impact in the quarter. For the month of September, PCM contributed $172 million in net sales, $28 million in gross profit and approximately $3 million in earnings from operations, including just over $2 million in intangible amortization expense. We also incurred estimated additional interest cost related to financing the acquisition of approximately $3 million in the quarter. We will have PCM for the entire quarter in Q4 2019 and expect seasonal top line performance consistent with prior year's PCM. Please note that historically, PCM has experienced lower gross margins in Q4 compared to earlier quarters.

In addition, also note that we currently expect amortization expense in Q4 in the fourth quarter to be approximately $6 million, which is up $2 million from the outlook we provided in the second quarter call, as we now have completed the preliminary assessment of the net assets acquired.

Lastly, we have line of sight for the cost synergies we previously committed and are on track to deliver more than 50% by the end of 2020.

Moving on to EMEA on Slide 12. Net sales in the third quarter increased 9% in constant currency to $356 million, an 11% increase in software sales and 8% increase in services sales year-over-year, were partly offset by a decrease in hardware sales to large of clients.

Gross profit grew 7% in constant currency, while gross margin decreased 30 basis points due primarily to lower margin on services sales in the quarter.

And operating expenses grew 8% in constant currency, and this drove adjusted earnings from operations to $3.4 million, down $1.7 million year-over-year. These results reflect performance in line with our expectations from the core business and a modest operating loss from the PCM business.

Moving on to EMEA -- to APAC on Slide 13. Net sales in the quarter increased 40% in constant currency to $42 million. The APAC region delivered year-over-year growth across all product categories in the third quarter. Gross profit grew 21% in constant currency and adjusted earnings from operations grew $700,000 year-over-year.

On the tax side, our effective tax rate for the third quarter of 2019 was 27.2%, up compared to last year and higher than our guided range due to the non-deductibility of certain acquisition and restructuring-related expenses.

Turning to our cash flow performance on Slide 14. Our cash conversion cycle was 42 days in the third quarter of 2019, up 4 days from the third quarter of 2018, due primarily to the inclusion of PCM's full accounts receivables, payables and inventory balances with only 1 month of related sales.

Year-to-date through the third quarter of 2019, our operations generated $169 million of cash compared to $247 million of cash last year. Our prior year results reflect a higher than normal seasonality for cash flow performance as well as the benefits and our enhanced focus on reducing age receivables balances.

Our year-to-date results through the third quarter of this year are more in line with typical seasonality. For the full year of 2019, we continue to expect cash flow from operations will be in our normalized annual range of between $160 million and $200 million.

In the first 9 months of 2019, we invested $17 million in capital expenditures with the same amount is invested in same period last year. We also used $28 million to buy back stock in the first 9 months of this year as compared to $22 million in the same period in 2018. All of this led to a cash balance of $141 million at the end of the third quarter, of which $120 million was resident in our foreign subsidiaries and $837 million was outstanding under our financing arrangements. This compares to a $111 million of cash and $269 million of debt outstanding at the end of the prior year quarter.

In the third quarter, we refinanced our existing revolving credit facilities into a single $1.2 billion asset-based loan maturing in 2024. As of September 30, we have $553 million outstanding under this facility, and current insurance at an average effective rate of about 4%.

Also in the third quarter, we issued $350 million in convertible notes maturing in 5.5 years, which bear cash coupon of 0.75%.

These notes have no call feature through year 3 and can be paid off thereafter under certain conditions. The initial conversion premiums notes is $68.32. In connection with the issuance cost of the convertible notes, we entered into calls by transactions to effectively increase the initial conversion price of the notes to $103.12. We like the convertible notes because they represent a lower cost of borrowing than the ABL and allow us to put a fixed-price tranche of debt into our capital structure for the intermediate term.

One last item in cash flow of 2019. We purchased a new corporate headquarters building in Arizona for $48 million. We've outgrown our current facilities in Arizona and expect to sell those facilities. We plan to relocate late in 2020. Moving on to Slide 15. I'd like to update you on our capital allocation priorities now that we have closed the PCM transaction. First, we plan to continue to invest in organic growth, including growing our technical and sales talent and optimizing our scalable IT infrastructure, e-commerce sites and service delivery platforms. Our second priority in the near term will be to pay down debt associated with the PCM acquisition. Our goal is to maintain a modest leverage of less than 1x absent acquisitions.

Thirdly, we will continue to pursue strategic M&A opportunities. We have developed a robust framework to guide our M&A decisions, and we have demonstrated the effectiveness of our integration process with past M&A transactions, such as Datalink and Cardinal. In general, we look for M&A transactions that will be accretive within the first full fiscal year following the acquisition, and we target an ROIC at 300 basis points above our weighted average cost of capital at the end of year 3. Lastly, we will return excess cash to shareholders after meeting the other priorities I just outlined. With that, I will now turn the call back to Ken to review our 2019 outlook. Ken?

[Kenneth Lamneck, President, CEO & Director]

Thank you, Glynis. Moving on to Slide 17. With respect to our full year 2019 outlook, included results of PCM for the last 4 months of the year, we expect net sales to increase between 9% and 11% compared to 2018. We expect diluted earnings per share for the full year of 2019 to be between $5.45 and $5.50. This outlook assumes an effective tax rate of 25% to 26% for Q4 2019. Capital expenditures of $70 million to $75 million for the full year, including the purchase of real estate in the fourth quarter of approximately $48 million and an average share count for the full year of approximately 36 million shares.

This outlook excludes intangibles amortization expense, acquisition-related expenses, service and restructuring expenses and amortization of convertible debt discount and issuance costs during the first 9 months of 2019, and those that may be incurred during the balance of 2019 and assumes no further purchase -- repurchases of our common stock over the balance of the year. This outlook is equivalent to an adjusted earnings per share of between $4.90 and $4.95 under our previous guidance methodology used in the second quarter and now includes PCM's operations, intangibles, amortization expense and additional financing costs for the full quarter.

Thank you again for joining us today, and thank you for all the teammates across the globe for their performance in the third quarter. That concludes my comments, and we'll now open your line up for questions.

[Operator]

[Operator Instructions]. Our first question today is coming from Matt Sheerin from the Stifel.

[Matthew Sheerin, Stifel, Nicolaus & Company]

Just a couple of questions. Just first regarding the contribution from PCM. I know you talked about growth rates, could you just give that apples-to-apples number? What was the contribution in the quarter?

[Glynis Bryan, CFO]

So it was only -- we only had PCM in the quarter for 1 month. It was $172 million of revenue, $28 million of GP. And essentially, when you net -- and that had a small contribution at the EFO line, but when you net it out, it was less than $0.01 in terms of total EPS in the quarter because of the interest below the line. And then [indiscernible] it's number or not, but as you go through the P&L, you end up with less than a penny of EPS.

[Matthew Sheerin, Stifel, Nicolaus & Company]

Okay. That's helpful. And then you talked, I think, Ken, about the expectation for -- I know you did, Glynis, about gross margin being down in the fourth quarter due to seasonality in North America. PCM, as you've pointed out, has higher gross margin. So is that a function of the seasonality in that business too?

[Glynis Bryan, CFO]

Yes. So the question that we -- the comment that I made regarding fourth quarter was specifically related to PCM. So if you look historically at the PCM business, their fourth quarter has always been 100-plus basis points lower than prior quarters. And my comment was related specifically to looking at expectations for PCM. Remember that their gross margin in the fourth quarter has historically been lower than other quarters. I'm not making any comments about the base Insight business.

[Matthew Sheerin, Stifel, Nicolaus & Company]

Got it. Okay. And then Ken, you talked about relative strength in IT spending, still pretty good demand in North America. Could you give us some further insight into the hardware segments, particularly, on the storage side where we are starting to hear from some peers and distributors of a bit of a pickup after a kind of a low or weakness for a couple of quarters?

[Kenneth Lamneck, President, CEO & Director]

Yes. Yes. I think -- and you've seen a lot of the data, of course, and some of the major suppliers out there in that regard. So I would say that the business continues to, I think, to gain momentum there. It certainly had gone through a lot, as you saw, but I think they're certainly -- that is coming back, and we're seeing some good strength across some pretty important vendors for us. So overall, it's not across the Board, it's in pockets. But I'd say, overall net-net, we are definitely seeing some pickup in the storage area.

[Operator]

Our next question today is coming from Marc Wiesenberger from B. Riley.

[Kara Anderson, B. Riley FBR, Inc.]

This is Kara Anderson on for Marc. Just the first question that I had is around the property purchase for the new headquarters in Arizona. I'm just wondering if there are any other plans for real estate -- for the real estate acquired through the acquisition of PCM?

[Glynis Bryan, CFO]

So yes. Welcome back, Kara. What we have planned, PCM owned 5 buildings across the country. We're going to be retaining 1, and we will be selling 5 over the next -- within the next year -- 4 over the next year. They will have to be replaced with other facilities, but we will leverage the fact that they are significantly underutilized, get the cash out of those buildings and use that to pay down debt. 3 of them are in California. So it actually means that we should actually be able to recoup some significant dollars to pay down debt with those purchase sales.

[Kara Anderson, B. Riley FBR, Inc.]

Got it. And then just looking at the sales mix in the quarter now with 1 month of PCM, is that kind of a reflective of the mix going forward? Or how should we think about that with PCM?

[Glynis Bryan, CFO]

The sales mix, you mean in hardware-software services, is that what you're talking about?

[Kara Anderson, B. Riley FBR, Inc.]

Yes.

[Glynis Bryan, CFO]

Okay. Well, it was 1 month of PCM in that quarter. I think that their business is a little bit less in terms of revenue associated with services, but the hardware-software side is probably a little bit more weighted towards hardware than our businesses. So in third quarter -- in the fourth quarter, you should see a little bit more hardware associated coming from PCM and not that much impact on our services number going forward because they were smaller services as a percentage of total revenue.

[Kara Anderson, B. Riley FBR, Inc.]

Got it. And then can you just go back through the guidance -- the EPS guidance. I think you pointed out that underlying assumption for the core EPS guidance embedded in the $5.45 to $5.50 EPS guide. Is that unchanged from previous guidance? Or did the core shift around?

[Glynis Bryan, CFO]

No. That is unchanged from previous guidance. In Q4, -- so I'll walk you through it. In Q2, we said $4.85 to $4.95, and we said that excluded PCM. What we're saying today is, for the fourth quarter, we're at $4.90 to $4.95, that does include PCM, but the contribution from PCM is nominal in that guidance. So it's still within -- as we view at the guidance range that we have previously expressed, we do have $2 million more of intangible amortization. Last time, we would've given you $4 million for intangible amortization in the guidance range that we provided. We now have $6 million based on our preliminary assessment of the net asset values. So that's the change, I guess, in the overall guidance as you get to that $4.90 to $4.95 number.

[Operator]

[Operator Instructions]. Our next question today is coming from Paul Coster from JPMorgan.

[Paul Chung, JPMorgan Chase & Co.]

This is Paul Chung on for Coster. So on the -- just a follow-up on the kind of guidance range, probably the bulk is from some amortization of add-backs, but just wanted to get a sense it's tackling, maybe, I don't know, anywhere between $0.15 and below is from the core business, is that the right way to think about it?

[Glynis Bryan, CFO]

I'm sorry, you're talking about the impact of amortization expense in the $4.40 -- the $5.45 to $5.50 number, is that your question?

[Paul Chung, JPMorgan Chase & Co.]

Yes, that's correct. I think it maybe around, I don't know, $0.40 kind of benefit from the add-back, is that correct? And then just wanted to get a sense for putting a number around the kind of the core business benefit?

[Glynis Bryan, CFO]

I'm sorry, just give me a second. In Q3, on a year-to-date basis, the add-back for intangible assets. So I'm looking at the schedule in the back. So I would tell you the add-back for intangible assets for the 9-month period was...

[Paul Chung, JPMorgan Chase & Co.]

Around $0.28, is that correct?

[Glynis Bryan, CFO]

Yes. Yes.

[Paul Chung, JPMorgan Chase & Co.]

All right. So if I take...

[Glynis Bryan, CFO]

And we are going to have an incremental $6 million in Q4 related to PCM. Sorry, in 2019, if you -- there is a slide in the deck in the appendix, Slide 19. And if you look at Slide 19, the intangible -- the stock -- sorry, the EPS associated with intangible amortization 9 months of 2019, it's $0.38. I think you said, $0.28, it's $0.38 before tax. And we are going to add $6 million, which is roughly $0.12 to that number for PCM plus whatever the normal quarterly amortization was before that.

[Paul Chung, JPMorgan Chase & Co.]

Okay. That's clarification. And as we think about kind of the normalized run rate from -- for some key operating items. Was it 3Q contribution in OpEx? Was that just 1 month? Or was it a full quarter impact? Or -- just wanted to get your thoughts on how to think about the combined business OpEx kind of run rate on a quarterly business or even on annual basis for the combined business?

[Glynis Bryan, CFO]

So the impact that you saw for PCM in September was just the impact of 1 month of their OpEx or revenue and gross margin -- gross profit included in our numbers. We will have 3 months of PCM in the fourth quarter, and we will start realizing some synergies, not many, but we'll start realizing some synergies around the -- mostly the corporate cost that start going very effective with the acquisition. So I can't give you a percentage number in terms of what that would translate to in terms of a run rate for OpEx, which I think is what you're asking before?

[Paul Chung, JPMorgan Chase & Co.]

Right. Right. Okay.

[Glynis Bryan, CFO]

If you look at what we told you between EFO and gross margin for PCM, that's a 1-month impact. I would assume that if you get that impact for the quarter and then maybe a slight discount for some synergizes, that would get you to a run rate for PCM in terms of [indiscernible] coming in, in 2020.

[Paul Chung, JPMorgan Chase & Co.]

Okay. And then kind of on a high-level last question. Some purchasing decisions, are you seeing kind of more interest in this trend of hardware as a service, which is kind of being offered by certain large OEM partners business? Does this -- how does it kind of impact your business? And do you see that accelerating from what your customers are saying?

[Kenneth Lamneck, President, CEO & Director]

Yes. Thanks of the question, Paul. This is Ken. Yes, we definitely are seeing. As the world starts to move more and more towards subscription-as-a-service, certainly in the software front, we're starting to see it also apply itself towards hardware. So there's some innovative programs in place. I'd still say, it's pretty early innings in that regard from some of the partners that we deal with as far as the traction. We're seeing a good amount of the course from the storage front, which Matt had sort of alluded to. There is certainly some of that happening in a pretty strong way there where they're all sort of looking at opportunities to provide choices for clients in order to provide it software-as-a-service or on premise. So that's definitely a trend, but it's -- again, it's still early to give you any kind of data points yet.

[Operator]

Thank you. We reach end of our question-and-answer session. Now, ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.