Restructuring pushes Insight's EMEA operations into the red

Reseller giant said it had to address some inefficiencies in its European operations in Q1

Reseller giant Insight has posted a loss for its EMEA region in Q1 after the firm shelled out $3.5m (€3.2m) on restructuring costs to tackle "inefficiency" in its Europe operations.

Global net sales grew by 26 per cent year on year for the three months ending 31 March to $1.48bn while earnings from operations grew 68 per cent annually to $22.95m.

Insight's EMEA segment also saw a year on year revenue improvement, with sales growing nine per cent annually to $330.4m, but the firm saw a $1.13m loss in operating earnings, compared with a profit of $2.72m posted in the same quarter last year.

The recorded loss in EMEA stems from Insight spending $3.53m on severance and restructuring expenses, which CEO Ken Lamneck said on an earnings call transcribed by Seeking Alpha was necessary to address "some inefficiency" in Insight's European operations.

"We believe there is an opportunity in certain [EMEA] markets to realign our cost structure to match current business volume. As a result, we took certain cost reduction actions and recorded $0.07 restructuring expenses in EMEA of $3.5m in the first quarter. We do not expect to incur the magnitude of this expense over the balance of 2017," he said.

"The sales growth obviously is pretty [good], 20 per cent constant currency growth, so really solid there. A few big deals [had] brought down the gross margin related to some large software enterprise agreements and some hardware deals."

He added: "But we looked and we said, hey, there [are] a couple of markets where there is some inefficiency."

Glynis Bryan, CFO at Insight said that she expects the $3.5m in restructuring costs to be paid off in two years' time, creating $2m in savings on an annual basis. Bryan said financial benefits of the restructuring will not be fully realised until 2018.

"So we took a $3.5m charge, the benefit that we're anticipating getting at on an annual basis is $2m. So most of that benefit we're not going to end up seeing in 2017, we would see that more in 2018… We [will] see a little bit of it in the second half, but primarily we'll see the benefit of that in 2018," she said.

Despite logging a loss in EMEA, Insight's North American business enjoyed buoyant growth, as net sales surged by 34 per cent year over year to $1.11bn for the quarter, and earnings from operations soared by 122 per cent annually to $23.2m, or 2.1 per cent of net sales.

APAC sales meanwhile fell by six per cent year over year to $36.2m, but earnings from operations boomed 98 per cent to $840,000 on a year on year basis.

Insight claims that its acquisition of Datalink, announced in January this year, added $130m to its top line and was a contributor to adjusted earnings from operations for the quarter.

On the same earnings call, Lamneck said that Insight is gaining market share in its North American datacentre and software business and maintained growth in hardware through devices sales.

"By client group, our strong top-line growth was primarily driven by increased volume with large enterprise and public sector clients while sales to SMB clients grew low single digits… Our review of hardware market shares suggest that Q1 growth across the channel was fuelled by demand for devices," he said.

"Large projects with new and existing clients showed shared gains in the server and storage categories. While we know that large projects can create volatility in our results, we have been gaining share on the datacentre category consistently over the last year and believe there was additional share available in [the] future as we begin to realise the power of the Datalink and Insight combination."

Lamneck claims that the integration of Datalink's sales, IT systems and back-office functions is already underway and Datalink was migrated onto Insight's SAP platform on 1 May.