J P M O R G A N North America Equity Research 15 December 2025 Hardware & Networking 2026 Outlook: AI Genie Will Keep Giving Boons; Look to EPS Upside Relative to Investors Pricing in Only Modest Acceleration; Top-Picks ANET, APH We have a favorable view on AI stocks for another year heading into 2026 and believe investors should stay the course with their positioning in the sector, as well as stocks positioned to be key AI beneficiaries; albeit, with a different rank order within the AI beneficiary group. ...

Core Insights - Insight Enterprises, Inc. (NASDAQ:NSIT) is viewed as a strong hardware stock by analysts, with a consensus 1-year median price target of $117, indicating a potential upside of 38.89% [1] - A recent coverage initiation by Luke Morison from Canaccord assigned a 'Hold' rating with a price target of $100, suggesting an 18% upside from the current price [2] Financial Performance - In the third quarter, Insight Enterprises reported an EPS of $2.43, which was $0.06 below estimates, and revenue of $2 billion, missing forecasts by $0.15 billion [3] - The company anticipates a modest improvement in demand from large clients, with guidance indicating flat gross profit for hardware and a slight increase in cloud services [4] Future Outlook - The full-year EPS projection for Insight Enterprises is set between $9.60 and $9.90, reflecting management's cautious optimism [4] - The company's strategic focus on AI and cybersecurity through recent acquisitions positions it favorably in emerging sectors [3][4]

Summary of Insight Enterprises Conference Call Company Overview - **Company**: Insight Enterprises (NasdaqGS:NSIT) - **Industry**: Technology Solutions and Services - **Headquarters**: United States - **Global Presence**: Operations in North America, EMEA, and APAC, with approximately 70% of revenue from North America - **Employee Count**: About 15,000, with nearly half in technical roles - **Founded**: 1988, transitioned to a solutions integrator strategy in 2022, combining hardware, software, and extensive services to drive high ROI for customers [4][5][6] Financial Performance - **Gross Margin**: Increased from just under 15% in 2022 to over 20% [8] - **Operating Expenses (OPEX)**: Currently in the low 70% range as a percentage of gross profit, with a long-term goal to reduce this to the lower 60% [11][12] - **Cash Flow**: Strong cash flow generation with a long-term goal of achieving 90% or greater net income conversion to free cash flow [9][46] - **Growth Areas**: Core services and cloud services, both expected to have a long-term CAGR of 16%-20% [10] Demand Trends and Market Outlook - **Current Demand**: Commercial business has been strong, with a device refresh cycle approximately 60%-75% complete [24][25] - **2026 Budget Expectations**: Anticipated budget increases for next year, but not expected to be dramatic; ongoing pressures from mergers and price increases have affected enterprise budgets [27][28] - **Price Increases**: Moderate price increases are being passed on to customers without significant margin compression [29][31] Strategic Changes and Challenges - **Partner Program Changes**: Significant impact from Microsoft and Google pivoting Insight's focus away from enterprise resale of cloud services, resulting in a $70 million impact on gross profit for the year [33][35] - **Leadership Changes**: Transition in board and management, including the retirement of a long-serving CFO and the search for a new CEO with expertise in both services and channel operations [20][22] AI and Future Opportunities - **AI Engagement**: Insight is well-positioned with strong relationships with AI leaders like Microsoft and Google; however, significant enterprise spending on AI is still in early stages [42][43] - **Acquisition Strategy**: The acquisition of Inspire11 is aimed at enhancing AI capabilities and customer engagement [44] Capital Allocation and Financial Strategy - **Capital Allocation Priorities**: M&A remains the top priority for capital allocation, with share repurchases also being a focus given current stock price levels [49][52] - **Debt Management**: Transitioning to a cleaner capital structure with the settlement of previous convertible debt and a successful high-yield bond issuance [54][55] Key Takeaways - **Positioning**: Insight is positioned for growth with strong partner relationships and a focus on the corporate and mid-market space, particularly in digital transformation and AI [58] - **Outlook**: The company is optimistic about the setup for the next year, emphasizing the importance of services in their strategy and the potential for growth in AI-related projects [58]

Summary of Insight Enterprises 2025 Conference Call Company Overview - **Company**: Insight Enterprises (NasdaqGS:NSIT) - **Industry**: IT Services and Solutions Key Points and Arguments Role of Reseller in IT Procurement - Insight Enterprises has redefined the traditional reseller role to become a solutions integrator, focusing on delivering outcomes through a combination of hardware, software, and services [3][4][8] - The company has built a strong services capability around its product offerings, including cloud, data, and AI solutions [5][6] Service Offerings and Competitive Landscape - Insight has expanded its service offerings through both organic growth and acquisitions, such as a recent acquisition in ServiceNow capabilities [7][12] - The company competes with traditional resellers and service companies by integrating hardware and software with strong service capabilities [9][10] Margin Expansion and Financial Performance - Insight benchmarks its service margins against top firms like Accenture, aiming for high 30s margins, while also improving hardware and software margins [12][14] - The company has experienced margin expansion due to a shift in product mix towards higher-margin cloud services, despite a recent $70 million impact from changes in partner programs with Microsoft and Google [17][18][43] Impact of AI on the Business - AI presents both opportunities and challenges; while it may cannibalize some traditional services, it also creates demand for advisory and deployment services [25][27][28] - Insight is positioning itself to leverage AI by offering outcome-based services rather than traditional time-and-material contracts [30][31] IT Budget Trends - IT budgets are generally expected to grow at a rate of a few hundred basis points above GDP, but current uncertainty around AI and economic conditions has led to a subdued spending environment [34][36] - Companies are increasingly vocal about their IT and AI needs, indicating a potential for growth in IT spending over the next few years [38][39] Market Opportunities and Growth Strategy - Insight sees significant potential in cybersecurity and data management, with plans for further investment and acquisitions in these areas [49][50] - The company aims to expand its market share by cross-selling services to existing clients, leveraging strong relationships built over time [46][48] Geographic Expansion - Insight is focusing on expanding its presence in the Middle East and strengthening its operations in Europe, while maintaining a strong focus on the US market [68] Hardware Refresh Cycle - The company estimates that the current hardware refresh cycle is about 60-70% complete, with ongoing demand for networking and edge computing solutions driven by AI [57][63] Other Important Insights - The complexity of technology stacks is increasing, necessitating advisory skills and technical expertise to assist clients [64] - Insight's approach to M&A is cautious, prioritizing organic growth while remaining open to strategic acquisitions [54][55] This summary encapsulates the key insights from the conference call, highlighting Insight Enterprises' strategic direction, market positioning, and financial outlook.

Core Insights - Insight Enterprises reported $2 billion in revenue for the quarter ended September 2025, reflecting a year-over-year decline of 4% [1] - The earnings per share (EPS) for the same period was $2.43, an increase from $2.19 a year ago [1] - The revenue fell short of the Zacks Consensus Estimate of $2.15 billion by 6.99%, while the EPS also missed the consensus estimate of $2.49 by 2.41% [1] Financial Performance Metrics - Net Sales from Services were reported at $426.07 million, slightly below the average estimate of $433.64 million, marking a year-over-year increase of 2.9% [4] - Net Sales from Products totaled $1.58 billion, which is lower than the average estimate of $1.75 billion, representing a year-over-year decline of 5.7% [4] - Gross Profit from Products was $172.45 million, compared to the average estimate of $190 million, while Gross Profit from Services was $261.74 million, exceeding the average estimate of $254.78 million [4] Stock Performance - Over the past month, shares of Insight Enterprises have returned -7.8%, contrasting with the Zacks S&P 500 composite's increase of 3.6% [3] - The stock currently holds a Zacks Rank 3 (Hold), suggesting it may perform in line with the broader market in the near term [3]

Financial Performance - Total net sales for Q3 2025 were $2,003,845, a decrease of 4.0% compared to $2,087,886 in Q3 2024[19]. - Net earnings for Q3 2025 were $50,947, down 12.9% from $58,208 in Q3 2024[22]. - Gross profit for the nine months ended September 30, 2025, was $1,282,999, a decrease of 3.3% from $1,326,378 in the same period of 2024[19]. - Earnings from operations for the nine months ended September 30, 2025, were $239,702, down 26.0% from $323,910 in the same period of 2024[19]. - Total comprehensive income for Q3 2025 was $41,188, significantly lower than $75,435 in Q3 2024, reflecting a decline of 45.5%[22]. - Net earnings for the nine months ended September 30, 2025, were $105,393,000, a decrease of 50.5% compared to $212,679,000 in 2024[28]. - Total consolidated net sales for the three months ended September 30, 2025, reached $2,003,845,000, a decrease from $2,087,886,000 in the same period of 2024, representing a decline of approximately 4.0%[92]. - For the nine months ended September 30, 2025, total consolidated net sales were $6,198,883,000, down from $6,629,033,000 in the same period of 2024, a decrease of about 6.5%[88]. Assets and Liabilities - As of September 30, 2025, total current assets increased to $6,504,283, up from $4,844,622 as of December 31, 2024, representing a growth of approximately 34.2%[17]. - Accounts receivable rose to $5,479,567, compared to $4,172,104 in the previous year, indicating an increase of about 31.2%[17]. - Total liabilities increased to $7,321,314 from $5,677,967, reflecting a rise of approximately 28.8%[17]. - Long-term debt surged to $1,392,626, up from $531,233, marking an increase of about 162.5%[17]. - Stockholders' equity decreased to $1,580,733 from $1,770,611, a decline of approximately 10.7%[17]. - Borrowings on the ABL revolving credit facility increased to $4,823,236,000, compared to $3,631,660,000 in the previous year, marking a rise of 32.9%[28]. - The ABL revolving credit facility had an outstanding balance of $899,804,000 as of September 30, 2025, with a maximum borrowing capacity of $1,800,000,000[46]. Cash Flow and Investments - Net cash provided by operating activities was $150,057,000, down from $417,731,000 in the same period last year, reflecting a decline of 64.1%[28]. - The company reported a net cash used in investing activities of $17,551,000, a decrease from $288,868,000 in the prior year[28]. - Cash, cash equivalents, and restricted cash at the end of the period totaled $549,447,000, up from $319,785,000, reflecting a 71.9% increase[28]. - The company repurchased 600,727 shares for approximately $75,000,000 at an average price of $124.85 per share during Q3 2025[69]. - For the nine months ended September 30, 2025, the company repurchased 1,200,727 shares at a total cost of approximately $151,118,000, with 600,000 shares purchased in a private transaction at a negotiated 3.95% discount[71]. Revenue Breakdown - Revenue for Q3 2025 totaled $2,003,845,000, with North America contributing $1,625,302,000, EMEA $319,758,000, and APAC $58,785,000[85]. - Hardware sales in Q3 2025 amounted to $1,144,225,000, while software and services generated $433,547,000 and $426,073,000, respectively[85]. - Software sales decreased to $433,547,000 in Q3 2025 from $536,261,000 in Q3 2024, reflecting a decline of about 19.2%[92]. - Services revenue for Q3 2025 was $426,073,000, down from $414,107,000 in Q3 2024, showing a growth of 2.9%[92]. Operational Efficiency and Future Outlook - The company anticipates that gross margin expansion could continue into future periods as it focuses on selling solutions and increasing services net sales[11]. - The company expects that pricing pressures in the IT industry will persist, impacting future profitability[11]. - Future income is projected to be sufficient to fully recover deferred tax assets, indicating a positive outlook on tax management[11]. - The company plans to utilize excess cash generated in 2025 for strategic acquisitions and to pay down its ABL facility[11]. - The company is committed to evolving its IT systems to enhance operational efficiency and service delivery[11]. Tax and Regulatory Matters - Effective tax rates for Q3 2025 and the first nine months of 2025 were 27.9% and 31.5%, respectively, higher than the federal statutory rate of 21.0% due to state income taxes and foreign earnings[63]. - As of September 30, 2025, the company had approximately $12,782,000 of unrecognized tax benefits, with $1,646,000 related to accrued interest[66]. - The company is currently under audit for tax years 2017 through 2022, with potential adjustments to unrecognized tax benefits expected to be insignificant[67]. Acquisitions - The company acquired Infocenter for a total purchase price of $265 million, enhancing its Solutions Integrator offering framework[96]. - On October 1, 2025, the company acquired Inspire11 for approximately $212 million, aimed at strengthening its AI capabilities[100]. - The company signed an agreement to acquire Sekuro for approximately AUD130 million, expected to enhance its cybersecurity capabilities in APAC[101].

Core Insights - Insight Enterprises reported quarterly earnings of $2.43 per share, missing the Zacks Consensus Estimate of $2.49 per share, but showing an increase from $2.19 per share a year ago, resulting in an earnings surprise of -2.41% [1] - The company posted revenues of $2 billion for the quarter ended September 2025, missing the Zacks Consensus Estimate by 6.99%, and down from $2.09 billion year-over-year [2] - Insight Enterprises has underperformed the market, with shares down approximately 31.8% year-to-date compared to the S&P 500's gain of 17.2% [3] Earnings Outlook - The current consensus EPS estimate for the upcoming quarter is $2.95 on revenues of $2.26 billion, and for the current fiscal year, it is $9.88 on revenues of $8.61 billion [7] - The estimate revisions trend for Insight Enterprises was mixed ahead of the earnings release, resulting in a Zacks Rank 3 (Hold), indicating expected performance in line with the market [6] Industry Context - The Retail - Mail Order industry, to which Insight Enterprises belongs, is currently in the bottom 16% of over 250 Zacks industries, suggesting potential challenges ahead [8] - Empirical research indicates a strong correlation between near-term stock movements and trends in earnings estimate revisions, which could impact investor sentiment [5]

Financial Data and Key Metrics Changes - In Q3 2025, the company reported a net revenue of $2 billion, a decrease of 4% compared to the previous year, primarily driven by a 6% decline in product revenue, particularly a 19% drop in on-premises software [17][18] - Adjusted earnings from operations increased by 5%, and adjusted earnings per share grew by 11% to $2.43 [17][18] - Gross margin expanded to a record 21.7%, an increase of 100 basis points year-over-year [6][18] Business Line Data and Key Metrics Changes - Cloud gross profit increased by 7% to $130 million, driven by double-digit growth in SaaS and IaaS, despite challenges from partner program changes [6][18] - Hardware revenue grew by 1%, marking the third consecutive quarter of growth, although it was below expectations [6][17] - Insight Core Services revenue decreased by 3%, primarily due to reduced spending from large enterprise clients [6][18] Market Data and Key Metrics Changes - Revenue from commercial clients grew by 5%, while corporate and large enterprise clients experienced a decline [5][6] - The company noted subdued demand from large clients, impacting overall performance in core services [6][14] Company Strategy and Development Direction - The company is focusing on structural improvements in its services business and expanding its capabilities in AI, cybersecurity, and data services [9][10][13] - Recent acquisitions, including Inspire11 and Securo, are aimed at enhancing the company's service offerings and positioning it as a leading AI-first solutions integrator [10][12][20] - The company is transitioning to an outcomes-based pricing model, moving away from traditional time and materials approaches [46][49] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about future growth despite macroeconomic challenges, anticipating improvements in demand from large clients and a continuation of the PC refresh cycle into 2026 [14][15][24] - The company expects cloud performance to grow and core services to return to growth in Q4 2025 [24][25] - Management emphasized the importance of AI in driving future growth and the need for a disciplined approach to service delivery [9][10][27] Other Important Information - The company repurchased approximately $75 million of shares during the quarter and has $149 million remaining on its share repurchase program [19] - Total debt increased to approximately $1.4 billion, primarily due to the acquisition of Inspire11 [21] - The company plans to update its KPIs and hold an investor day in the upcoming year [69] Q&A Session Summary Question: Update on large project headwinds to core services - Management noted that large enterprises are grappling with IT budget allocations and macro uncertainty, leading to delays in engaging in big services projects [33][34] Question: Cloud gross profit growth and underlying growth rates - Management indicated that underlying growth in cloud remains strong, with expectations of returning to historical growth rates as they exit Q4 [39] Question: Strategic rationale behind recent acquisitions - The company believes that AI is a critical growth area and that the acquisitions will enhance their capabilities in delivering outcomes-based services [46][49] Question: Scaling the services business - Management discussed the importance of adopting a disciplined methodology to improve scalability and profitability in the services sector [63][68]

Q3 2025 Performance Highlights - Net sales reached $2 billion, a decrease of 4% year-over-year[31] - Gross profit remained flat year-over-year at $434 million[31] - Cloud gross profit increased by 7% year-over-year to $130 million[31] - Insight Core Services gross profit decreased by 3% year-over-year to $79 million[31] - Adjusted earnings from operations increased by 5% year-over-year to $126 million[31] - Adjusted diluted earnings per share increased by 11% year-over-year to $243[31] YTD Q3 2025 Performance - Net sales totaled $62 billion, a decrease of 6% year-over-year[32] - Gross profit decreased by 3% year-over-year to $13 billion[32] - Adjusted diluted earnings per share decreased by 1% year-over-year to $693[32] Full Year 2025 Outlook - Gross margin is expected to be approximately 21%[33] - Adjusted diluted EPS is projected to be between $960 and $990[33]

Financial Performance - Consolidated net sales for Q3 2025 were $2.0 billion, a decrease of 4% year over year, with hardware net sales increasing by 1%[2] - Consolidated net earnings decreased by 12% year over year to $50.9 million, primarily due to higher interest expenses[2] - Adjusted earnings from operations increased by 5% year over year to $126.4 million, representing 6.3% of net sales[13] - Diluted earnings per share for the quarter was $1.62, up 7% year over year, while adjusted diluted earnings per share increased by 11% to $2.43[2] - North America net sales decreased by 5% year over year to $1.6 billion, with product net sales down 6%[8] - EMEA net sales increased by 2% year over year to $319.8 million, while APAC net sales remained flat at $58.8 million[8] - Total net sales for Q3 2025 were $2,003,845, a decrease of 4% compared to $2,087,886 in Q3 2024[25] - Product sales decreased by 6% to $1,577,772 in Q3 2025 from $1,673,779 in Q3 2024, while service sales increased by 3% to $426,073[25] - Net earnings for Q3 2025 were $50,947, down 12% from $58,208 in Q3 2024, with diluted earnings per share decreasing by 42% to $1.62[25] - GAAP consolidated net earnings for Q3 2025 were $50,947 thousand, down from $58,208 thousand in Q3 2024, representing a decrease of 2.5% as a percentage of net sales[47] Profitability Metrics - Gross profit remained flat at $434.2 million, while gross margin expanded by 100 basis points to 21.7%[7] - Gross profit for Q3 2025 was $434,195, slightly up from $432,085 in Q3 2024, resulting in a gross margin increase of 100 basis points to 21.7%[25] - The company anticipates gross profit to be slightly down from 2024, with a gross margin of approximately 21%[15] - GAAP consolidated EFO for Q3 2025 was $93,067, compared to $92,851 in Q3 2024, reflecting a slight increase of 0.2%[41] - Adjusted non-GAAP consolidated EFO for Q3 2025 was $126,448, up from $120,117 in Q3 2024, representing a growth of 2.8%[41] - Adjusted non-GAAP EBITDA for Q3 2025 was $137,008 thousand, an increase from $128,772 thousand in Q3 2024, reflecting a growth of 1.6% as a percentage of net sales[47] Expenses and Costs - Selling and administrative expenses rose by 1% to $332,907 in Q3 2025, while severance and restructuring expenses decreased by 37%[25] - The company reported acquisition and integration-related expenses of $2,831 in Q3 2025, a significant increase of over 100% compared to $695 in Q3 2024[25] - GAAP selling and administrative expenses for Q3 2025 were $332,907 thousand, slightly up from $329,996 thousand in Q3 2024, with GAAP expenses as a percentage of net sales increasing to 16.7% from 15.9%[47] - Adjusted non-GAAP selling and administrative expenses decreased to $307,747 thousand in Q3 2025 from $311,968 thousand in Q3 2024, with adjusted expenses as a percentage of net sales rising to 15.4% from 14.9%[47] - Interest expense for Q3 2025 increased to $25,387 thousand from $19,184 thousand in Q3 2024, marking a rise of 32.5%[47] - Income tax expense for Q3 2025 was $19,711 thousand, compared to $16,910 thousand in Q3 2024, reflecting an increase of 16.5%[47] - Transformation costs for Q3 2025 were $2,929 thousand, down from $5,068 thousand in Q3 2024, indicating a reduction in restructuring efforts[47] Cash Flow and Assets - Cash flows provided by operating activities were $249.1 million for the quarter[7] - Cash and cash equivalents increased to $547,017 as of September 30, 2025, compared to $259,234 at the end of 2024[37] - Accounts receivable, net, rose to $5,479,567 as of September 30, 2025, from $4,172,104 at the end of 2024, indicating a significant increase of 31.2%[37] - Total current assets increased to $6,504,283 as of September 30, 2025, compared to $4,844,622 at the end of 2024, representing a growth of 34.2%[37] - The company reported a net cash provided by operating activities of $150,057 for the nine months ended September 30, 2025, compared to $417,731 in the same period of 2024[39] - The company experienced an increase in accounts payable of $1,100,776 for the nine months ended September 30, 2025, compared to $374,166 in the same period of 2024[39] Future Outlook - For the full year 2025, the company expects adjusted diluted earnings per share to be between $9.60 and $9.90[15] - The company anticipates continued challenges due to inflation and higher interest rates, impacting future financial performance and operational results[29] - Average stockholders' equity for the twelve months ended September 30, 2025, was $1,662,814 thousand, compared to $1,746,223 thousand in 2024, showing a decrease of 4.8%[50] - Adjusted non-GAAP consolidated EFO for the twelve months ended September 30, 2025, was $487,176 thousand, compared to $521,631 thousand for the same period in 2024, indicating a decline in performance[50] - Adjusted non-GAAP ROIC from GAAP consolidated EFO for the twelve months ended September 30, 2025, was 9.24%, down from 14.24% in 2024[50] Regional Performance - EMEA total net sales increased by 2% to $319,758 in Q3 2025, driven by a 30% increase in service sales[27] - APAC total net sales remained stable at $58,785 in Q3 2025, with service sales growing by 4%[27] - North America segment GAAP EFO for Q3 2025 was $83,631, compared to $80,836 in Q3 2024, reflecting a growth of 2.2%[43] - EMEA segment adjusted non-GAAP EFO for Q3 2025 was $10,526, an increase from $8,080 in Q3 2024, representing a growth of 30.3%[45] - APAC segment adjusted non-GAAP EFO for Q3 2025 was $6,057, compared to $5,487 in Q3 2024, indicating an increase of 10.4%[45]