Insight Enterprises Inc (NSIT) Q4 2018 Earnings Conference Call Transcript

NSIT earnings call for the period ending December 31, 2018.

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Insight Enterprises Inc  (NASDAQ:NSIT)
Q4 2018 Earnings Conference Call
Feb. 14, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Greetings, and welcome to the Insight Enterprises Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It it's now my pleasure to introduce your host, Ms. Glynis Bryan, CFO. Thank you, Ms. Bryan. You may begin.

Glynis Bryan -- Chief Financial Officer

Thank you very much. Welcome, everyone, and thank you again for joining the Insight Enterprises earnings conference call. Today we will be discussing the company's operating results for the quarter and full year ended December 31, 2018. I'm 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 two 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, February 14, 2019. This call is the property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form, without the expressed written consent of Insight Enterprises is strictly prohibited.

In today's conference call we will refer to non-GAAP financial measures as we discuss the fourth quarter and full year 2018 financial results. When referring to non-GAAP measures, we will refer to such measures as adjusted. Non-GAAP measures to be discussed in today's call include; adjusted earnings from operations, adjusted diluted earnings per share, adjusted return on invested capital and adjusted free cash flow. You will find a reconciliation of these adjusted measures to our actual GAAP results included in the press release and the accompanying slide information issued earlier today.

Also, please note that unless highlighted as constant currency, all amounts and growth rates discussed are in U.S. dollar terms. Additionally, any references to our core business or organic change year-over-year in our performance will exclude the results of Cardinal Solutions subsequent to the acquisition in August 2018.

Lastly we adopted ASC 606 effective January 1, 2018, on a modified retrospective basis. As discussed on previous calls, this means that we have not represented the 2017 results shown in our earnings release or presentation materials issued earlier today.

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 periodic reports and subsequent filings 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 4. Ken?

Kenneth Lamneck -- President and Chief Executive Officer

Hello, everyone, and thank you for joining us today to discuss our fourth quarter and full year 2018 operating results. I'm pleased to report we delivered another quarter of strong earnings performance in the fourth quarter. Against a difficult comparison to our strong fourth quarter results last year, our team executed very well to expand gross margins and grow our bottom line results by double digits.

Specifically, for the fourth quarter of 2018, consolidated net sales were $1.7 billion, down just under 2% year-over-year including the effect of the adoption of ASC 606 which has resulted in more sales reported on a net basis for us in 2018 and compared to the tough comparison of 22% year-over-year growth reported in the fourth quarter of last year.

Consolidated gross profit of $254 million in the fourth quarter was up 9% year-over-year and up 10% in constant currency. Gross margin expanded 140 basis points year-over-year to 14.5%, reflecting a higher mix of sales of cloud-based and netted software offerings in the core business and higher professional services sales with the acquisition of Cardinal Solutions completed in August 1st.

Consolidated selling and general administrative expenses were $195 million, up 6% year-over-year and 7% in constant currency, largely due to the acquisition of Cardinal. However, selling and administrative expenses as a percent of gross profit were down 260 basis points year-over-year.

Adjusted earnings from operations were up 23% year-over-year to $59 million and adjusted earnings from operations margin expanded 70 basis points to 3.4% of sales. On a GAAP basis, earnings from operations were up 29% compared to the same period last year and adjusted diluted earnings per share was $1.32, up 63% year-over-year on a GAAP basis. Diluted earnings per share was $1.31.

Moving on to Slide 5. Our fourth quarter results reflect a strong close to another record year for our company. For the full year 2018, we delivered record topline sales surpassing the $7 billion mark for the first time. The team is focused on optimizing product mix and expanding our service offerings, drove gross profit faster than sales at 8% year-over-year, and improved gross margin by 30 basis points to 14% also a new record for the company.

Topline growth and gross margin expansion combined with continued expense discipline drove adjusted earnings from operations up 21% in 2018 compared to the prior year. These results are particularly impressive when compared to the 24% of adjusted earnings growth delivered in 2017. Adjusted earnings per share for the full year of 2018 was $4.63.

In addition to the third year in a row, our team delivered another record year. We also delivered significant stronger cash flow results and improved our adjusted ROIC metrics materially year-over-year.

On Slide 6, as we look back in our business for the full year of 2018, we are pleased with all that we accomplished. We invested in teammate development programs and benefits to ensure we can compete for and retain strong talent across the business. We have a values-based culture and we know that our teammates are our number one asset.

As a result of our 2018 efforts, we were recently recognized as a Fortune Top 100 Best Companies for Diversity and also ranked Number 23 on Fortune's Best Workplaces in Technology list.

Our global teams delivered a third consecutive year of double-digit earnings growth with growth delivered by each of our geographic operating segments. Next we accelerated our focus on cash management enhancing our internal management systems and discipline around investments and inventory receivables which drove adjusted free cash flow of $260 million for the full year.

As a result of our strong earnings growth, disciplined cash management practices, and lower tax rate, our return on invested capital metric hit a new high of 16.9%, an increase of more than 300 basis points over 2017.

In addition we continue to improve the efficiency of our client-facing operations, reengineering key workloads with process automation, and optical scanning technologies, while also making significant investments in our e-commerce and digital marketing platforms.

And our partner ecosystem is stronger than ever. We continue to hold top share positions with our strategic partners and are actively engaged to provide emerging solution partners access to our talent and our clients.

Next, we continued our strategic efforts to help our clients evaluate and implement cloud technologies, which led to gross profit earned from cloud services become an 18% of our consolidated gross profits in 2018, up from 13% last year. In addition for the third year in a row, our team earned a position in Gartner's Magic Quadrant for magic -- for Managed Workplace Services, placing us in the top 21 companies in North America. Not only is this an indication of the great work that our Connected Workforce team has accomplished already, but it provides an advantage for bringing our solutions to new clients in 2019 and beyond.

Finally, we acquired Cardinal Solutions on August 1, 2018 and substantially completed the integration of IT systems and back office operations in late January of 2019. We are pleased with the financial results of the business in the first two quarters as part of Insight and we're already seeing some early wins for cross-sell in our combined clients. I want to take just a moment and thank our valued teammates, loyal clients, dedicated partners across the globe for delivering a record year for Insight in 2018.

Moving to slide 7. As we head into 2019, the IT market is healthy and growing. Across the markets where we do business, industry analysts expect flat to low single-digit growth in hardware sales in 2019 and mid single-digit growth in software and services sales. Our plans for 2019 are focused on driving growth in excess of the market across our operating segments.

In 2019, we will continue to empower our clients to manage our IT environments more efficiently for today, so they can drive meaningful business outcomes and transform their own business for the future. To do this, we will leverage our four solution areas to further enhance our value proposition to clients around the world, align our offerings to clients' needs and utilize our strategic partner relationships and organize our resources to target key areas of opportunity in the market.

As a reminder, our four solution areas are: one, supply chain optimization, which focuses on driving operational excellence in order to help our clients optimize costs and improve efficiency; two, Connected Workforce, which focuses on improving and enabling the workplace to attract and retain talent in addition to improving overall worker productivity; three, cloud and data center transformation, which helps clients optimize their data center infrastructure and migrate to a cloud environment to improve speed of business delivery, increase business agility and enhance security; and lastly, digital innovation, which leverages innovative applications to improve clients' business performance and uncover new revenue streams for them.

Each of our solution areas represented discrete area of growth for our business and when connected to each other provides a platform for our clients to leverage our breadth of expertise to solve the most relevant business challenges from an IT supply chain to optimizing performance in a digital world.

Our strategy in 2019 is to grow market share by expanding in a four solution areas with new and existing clients across our geographic footprint in North America, EMEA and APAC. As part of this model, we can serve clients directly in each of our markets or serve our clients -- single client globally where they enjoy common experience across our footprint. In support of our go-to-market strategy globally, we have a strong operational platform that includes scalable IT and e-commerce systems and processes, robust digital marketing capabilities and a culture of continuous business process transformation and automation.

In 2019, we'll continue to invest in this critical area to ensure we can deliver a great client experience while also optimizing our infrastructure to scale with future growth. Over the past five years, we have made significant progress as a company transforming our business from a solution provider to a well-respected global systems integrator with deep expertise across multiple technology areas, our clients value most.

Today we have a single united global leadership team, integrated and scalable IT systems, and operations, a highly engaged workforce, and a clearly defined go-to-market motion around our four solution areas.

In 2018, our disciplined execution against our long-term strategy allowed us to accelerate our financial performance, resulting in another year of record financial results and positions us well to compete vigorously in the marketplace in 2019 and beyond.

I'll now hand the call over to Glynis.

Glynis Bryan -- Chief Financial Officer

Thank you, Ken. As Ken noted earlier, we're pleased with the progress we made in 2018, delivering strong top and bottom line results, improving our cash flow generation, and making strategic investments in your business that will help position us to compete in the future.

I'll take a few minutes to summarize the fourth quarter and full year results of our geographic operating segments, and will then cover taxes and cash flow performance.

Moving on to slide 9, in North America in the fourth quarter, hardware sales increased 1% year-over-year that is compared to a 34% increase in hardware sales in the fourth quarter of last year. Services sales increased 35%, including higher sales of cloud subscription and warranty offerings and the acquisition of Cardinal.

Software sales decreased due to a higher mix of software sales now reported net and now included in our services category. Gross profit in North America was up 7% year-over-year and gross margin improved 120 basis points, reflecting the increase mix of services sales in the business. In addition, we focused on controlling costs, which allowed us to grow adjusted earnings from operations, 15% year-over-year to $45 million.

Moving on to slide 10. For the full year, net sales in North America grew 3% year-over-year, hardware and services sales grew 8% and 23%, respectively, which more than offset the decline in software sales.

As I've said previously, more software sales are recorded net in 2018 as a result of ASC 606 and the continued migration of software licenses to cloud subscriptions. In addition, both of those are now reported in services sales.

From a profitability perspective, gross margin in North America in 2018 increased 40 basis points year-over-year and when compared with tight expense control across the business, adjusted earnings from operations in North America increased 17% year-over-year, representing the third consecutive year of double-digit earnings growth by our North America business.

And on slide 11, in EMEA net sales in the fourth quarter grew 4% in constant currency including double-digit growth with mid-market clients and low-single digit growth in the public sector.

Enterprise spending was down year-over-year, but our team focused on profitability and grew gross profit 16% year-over-year in constant currency. As a result, gross margin expanded 160 basis points, which drove adjusted earnings from operations up 40% compared to the same period last year.

On the -- for the full year of 2018 in constant currency, our EMEA business grew net sales by 9% compared to 2017. Strategically, we focused on growing our share of the hardware market, primarily in the United Kingdom and continued to help clients optimize their IT options in the cloud across regions and this grew gross profit faster than sales at 12% in constant currency and gross margin, up 50 basis points year-over-year. Expenses in EMEA grew slower than sales and this helped drive the 50% adjusted earnings from operations growth reported by our EMEA segment for the full year.

Moving on to slide 13. In APAC, net sales in the fourth quarter decreased 2% in constant currency due to an increased mix of cloud and software maintenance sales recorded net. Gross profit grew 40% in constant currency, while gross margins expanded significantly from prior year due to the increased mix of netted sales and higher product margin. The increase in gross profit was slightly offset by an 8% increase in operating expenses related to variable compensation, which led to adjusted earnings from operations growth of 178% compared to the fourth quarter of 2017.

For the full year in 2018 in constant currency, our APAC business grew net sales by 13%, compared to 2017 with fine execution across each of hardware software and services categories. Strategically, our team focused on expanding our digital services capability into Sydney and Melbourne, which drove professional services sales up double-digit, but also initial setup cost dampened gross margin in the short run.

However, the team is focused on controlling expenses -- reduced selling and administrative expenses as a percentage of gross profit by more than 300 basis points year-over-year and this led to adjusted earnings from operations growth of 27% compared to 2017.

Before I go to taxes, I want to provide some color about how our strategy is impacting our business mix and profitability. In 2018, services sales grew greater than 20% year-over-year in each of our operating segments. As Ken noted, our solution area strategy has refined our focus on modern services and solutions that best meet our clients' needs. From my viewpoint, this strategy is also important because of its positive effect on our overall profitability.

In 2018, services net sales were 12% of our consolidated net sales, an increase of 180 basis points year-over-year, while services gross profit at 46% of our consolidated GP in 2018 was up more than 300 basis points over 2017. As a result, our services -- as a result of our services growth -- as a result, our services growth was the main driver of our gross profit -- gross margin expansion year-over-year to a new record of 14%.

Moving on to our tax rate on slide 15. Our effective tax rate in 2018 was down 23% -- was 23%, down from 43% last year due primarily to the U.S. tax reform enacted at the end of 2017. As we head into 2019, we expect our global effective tax rate will be between 25% to 26% for the full year. This includes the 21% U.S. federal tax component, fee income taxes, the impact of limitations on the deductibility of certain expenses among other changes related to the U.S. federal tax reform and also the effects of foreign earned income.

Rounding out our cash flow performance on slide 15, our operations generated $293 million of cash compared to the use of cash last year of approximately $307 million. Our strong cash flow this year reflects our enhanced focus on reducing accounts receivable balances, minimizing general clients and specific inventory investments and other productivity improvements.

For the full year of 2019, we expect cash flow from operations will be on a normalized annual range between $160 million and $200 million. In 2018, we invested approximately $17 million in capital expenditures, down 10% year-over-year and we used $22 million to repurchase approximately 641,000 shares of the company's common stock.

Cardinal Solutions was acquired in the third quarter of 2018 for approximately $79 million net of cash acquired and including estimated final working capital and tax gross up adjustments. For comparison, we used $187 million to acquire Datalink and Caase in 2017.

All of this led to a cash balance of $143 million at the end of the fourth quarter of which $108 million was resident in our foreign subsidiaries and we had $197 million of debt outstanding under our financing arrangement. This compares to $106 million of cash and $330 million of debt outstanding at the end of 2017.

Our cash conversion cycle was 33 days in the fourth quarter of 2018, down two days year-over-year. Accounts receivable and accounts payable increased as a result of the adoption of ASC 606, but had a similar effect on cost of sales and cost of goods sold and this adversely affected our cash conversion cycle of two days.

I will now turn the call back to Ken to review our 2019 outlook.

Kenneth Lamneck -- President and Chief Executive Officer

Thank you, Glynis.

Moving on to slide 16. We are pleased with our execution in 2018 and believe our business is healthy across each of the markets in which we compete. With respect to our full year 2019 outlook, we expect to deliver sales growth in the mid-single-digit range compared to 2018. We also expect diluted earnings per share for the full year of 2019 to be between $4.75 and $4.85. This outlook assumes an effective tax rate of 25% to 26% for the full year 2019.

Capital expenditures of $20 million to $25 million for the full year and average share count for the full year of approximately 36.2 million shares. This outlook does not reflect to repurchase any shares that maybe made under our current share repurchase program and assumes no acquisition-related or severance and restructuring expenses.

Thank you again for joining us today. I want to once again thank our teammate across the world for everything they do for Insight. I'm honored to be part of such a great team. That concludes my comments. We'll now open your line up for your questions.

Questions and Answers:

Operator

We will now be conducting a question-and-answer session, (Operator Instructions) First question is from Mr. Adam Tindle, Raymond James Financial. Please go ahead, sir.

Adam Tindle -- Raymond James Financial -- Analyst

Okay. Thanks. Good morning, and congrats on the strong 2018. Ken, I just wanted to start on the 2019 outlook. I know there's a lot of confusion out there in the investment community. There seems to be a view that tough comparisons year-over-year from tax reform benefit in 2018, a potential slowing hardware cycle a number of different things that are going to make growth more difficult. But it seems like at the distributor and the reseller level, we're seeing pretty healthy continuation of solid spending into year-end and outlooks beyond that. So I know you mentioned the industry analyst's expectations for growth in your prepared remarks but I'm just hoping that you can maybe talk about this dynamic and then also what you're hearing from both the customer and partner level on expectations for 2019?

Kenneth Lamneck -- President and Chief Executive Officer

Yeah. Thanks, Adam for that. Yeah. I would say overall from what we see and of course we have visibility real visibility probably a few quarters out for our business as far as pipeline and bookings. And I would say that things definitely look healthy across the four solution areas that we represent. So, good activity going on of course in the area of desktops notebooks sort of the device area.

So we continue to see that. Again, as we've said is this a cycle or is just a continuation. We think it will be a little bit lumpy because of just big sort of refreshes that we do with large enterprise clients. But overall everything we're seeing and hearing is actually -- continues to be pretty strong. So no pull back from us in that area.

Our cloud and data center transformation business as far as focus on the network server storage activity we're seeing some really good cross-sell activity between Insight and traditional sort of Datalink and really starting to take advantage of that. So we continue to see that go strong. And of course cloud sales continue to be very, very strong when you look at the things that we're doing with things like Microsoft Azure, Office 365 and so forth. So we continue to see the market to be healthy and to be moving on as more and more of our clients, of course, are looking to digitally how do they improve and enhance their business. And IT continues to be more of a solution for them. So we remain pretty consistent with what we've seen in the last few quarters.

Glynis Bryan -- Chief Financial Officer

Adam, can I just maybe translate that in terms of just numerically how that translates into the guidance that we gave. So we'd expect that our growth rate is going to be in the low to mid single-digit range overall, including hardware and software services, given the comments that Ken made. So we anticipate continuing to grow in 2019. We expect that the gross margin is going to be relatively consistent with where we ended 2018. Given all of that, we've seen a little bit more conversion to the cloud, but we expect it to be relatively consistent.

And when you look at our EPS guidance, it's relatively low on a year-over-year basis and there're two drivers of that. One is, interest expense is anticipated to be a little bit higher given the higher interest rate environment that we're in, as well as the fact that we had a lower tax rate in 2018 at 22.97% versus the mid-range that we're giving you of around 25.5% to 2019, so that mutes the EPS guidance that we've anticipated. Our EFO would be -- our operating income would be higher than that on a year-over-year basis. If you do the math, you will get to about 7% growth there.

Adam Tindle -- Raymond James Financial -- Analyst

Yeah. That's really helpful and I want to touch on the EFO guidance, because it seems to suggest kind of a maybe a modest increase to margins on the EFO line. But you've got revenue growth, like you said, in kind of mid-single-digit range, you would expect some leverage.

Seems like some of the higher-margin areas are growing nicely. But I'm just trying to understand why we wouldn't see more increase on the EFO line. I know Ken mentioned some investments in the prepared remarks, so there're some things that are offsetting. Just talk about the puts and takes of the EFO margin in 2019 and why it's kind of modest to flattish?

Glynis Bryan -- Chief Financial Officer

It is modestly up. Modestly flattish, I guess, would be a good explanation for that. And part of it is around the investments that we're continuing to make in the business. We actually had a very strong 2018 on top of a very strong 2017. And we want to continue the trend, but there are certain investments that we're making as we pivot more toward our solution areas that cover Connected Workforce, could and data transformation and digital innovation. Those are going to be the drivers of margin expansion for Insight in the future and we're continuing to make investments to ensure that we will drive that further going forward.

I just want to make one other comment. You will remember, Adam, that I think we've talked about this, that in Q1 of last year, it was a very strong Q1 for Insight. I think we didn't see the normal seasonal dip in Q1 of last year that we typically see. It was about as strong as December in terms of revenue growth. We'd anticipate that revenue growth may be more muted in Q1, but that we'd still be able to generate EFO and gross margin expansion.

Adam Tindle -- Raymond James Financial -- Analyst

So you beat me to the punch, I was just going to go there. I just had one final clarification, because I know in the previous call you had talked about a large deal in Q1. Can you maybe just update us on that? So I had been thinking that perhaps with that large deal we'd see kind of similar trends to last year, where we don't see that drop-off in revenue sequentially from Q4. But just give as an update on what happened with the large deal.

Glynis Bryan -- Chief Financial Officer

The large deal is still going to be coming in. It is netted. So the impact -- I guess, when we talked about it, we didn't really focus on the revenue side of that transaction, but it's a netted deal, so the impact on revenue isn't going to be that great.

Adam Tindle -- Raymond James Financial -- Analyst

Okay. So then...

Glynis Bryan -- Chief Financial Officer

It's not driving higher revenue growth in Q1 of 2019.

Adam Tindle -- Raymond James Financial -- Analyst

So we didn't have above kind of normal sequential EFO dollar growth as a result and think of kind of maybe as not quite as much of an uplift in Q2 as in prior years? I just want to make sure we've got all the nuances.

Glynis Bryan -- Chief Financial Officer

You're actually correct.

Adam Tindle -- Raymond James Financial -- Analyst

Okay. Thanks.

Operator

The next question is from Matt Sheerin Stifel. Please go ahead, sir.

Matthew Sheerin -- Stifel -- Analyst

Yes. Thanks. Good morning, everyone. Just a couple of questions from me. One, just on your revenue expectations for the year, software versus hardware. On the software side, are you -- on an apples-to-apples basis, are we sort of looking at fair comps here given the 606 transition and also the continued migration toward services model with customers? So trying to figure out -- because last year, obviously, software was down but because some of that transitioned into services. So I'm trying to figure out how we should think about the actual software number this year.

Glynis Bryan -- Chief Financial Officer

So on the software number, Matt, the 606 impact goes away because now we're apples-to-apples 2019 versus 2018, as it relates to the 606 impact, primarily around maturity. The other conversion that's the migration to cloud is still going to continue. That's just the normal trend in the marketplace of on-prem solutions migrating more toward cloud-based solutions.

Those cloud-based solutions are going to be reported net and that's just something that will be in the services line. So I don't want you to walk away thinking there's no pressure on the software line going into 2019, but I think we reported that it's going to -- it was a $122 million impact on the software line in 2018 versus 2017. That's not the kind of impact you're going to see going forward, because most of that was related to 606.

Matthew Sheerin -- Stifel -- Analyst

Well, that's what I'm trying to figure out, because if it is slower, I mean, it seems to me just modeling it that the software top line would grow slower. But in theory you should have higher or at least gross profit dollar growth because of the netted down, which is -- but you're guiding basically flat gross margin for the year, so I would've thought that you might still get a boost there, just on that mix issue.

Glynis Bryan -- Chief Financial Officer

People get a little bit of a boost associated with gross margins in different quarters. But in the back half of 2018, I think, you remember in our second quarter call, we said that we anticipated revenue growth was going to be muted in the back half as the mix of our business changed and that we would anticipate that our gross margins would be higher in the back half of the year.

So we're coming out of 2018 strong in terms of gross margins in Q4. And going into Q1 through the rest of the year, we would anticipate that we'll see some strength in our gross margins, but we don't really know how the percentage of cloud conversion is going to play out in 2019, so we may be a bit conservative. But we're not going to see the big benefit that we got in 2018 associated with netting, because that 606 differential goes away as well.

Matthew Sheerin -- Stifel -- Analyst

Okay. That's helpful. And on the services business, you talked -- I think, Ken, you talked about numbers, a percentage of your total gross profit dollars. Could you remind me what that was?

Kenneth Lamneck -- President and Chief Executive Officer

Yes. What we said there, Matt, was the fact that 18% of our gross profit now is coming from cloud-services type of sales and that's compared to 13% the year before.

Matthew Sheerin -- Stifel -- Analyst

Okay. But what about your total services segment?

Glynis Bryan -- Chief Financial Officer

I think in my comments, Matt, I said about 46% -- 45% of our total GP comes from services. And that would be the combination of professional services, Insight-delivered service as well as the cloud component and other netted pieces.

Matthew Sheerin -- Stifel -- Analyst

Yeah. Could you maybe list in order the components of that services because it's such a big percentage of your gross profit now? So could you remind us?

Glynis Bryan -- Chief Financial Officer

In order?

Matthew Sheerin -- Stifel -- Analyst

Yes.

Glynis Bryan -- Chief Financial Officer

I'm not going to list it in order. In terms of you're trying to go which is the largest piece going down I don't have that off the top of my head, but we can certainly put it on the website I guess and we'll follow-up with that. But the components that are within our services would be if you think through Microsoft EA anything that's a fee-based revenue inside that are netted is going to be a part of that services number. So there are pieces that are agency fees that will be categorized that way. That would include software assurance. It would include EACs. It would include cloud transactions. It would include warranty on hardware. Those are the primary fee-based pieces that are included in that services component.

And then on the "Insight-delivered piece" it would be the standard piece that we have around our technical services, our professional services, our consulting services. All of our Digital Innovation group actually ends up being a services-driven revenue. So those are the major components that flow into our services business and we'll -- we can put a schedule on the website that gives -- that provides that detail and then you'll see the numbers.

Matthew Sheerin -- Stifel -- Analyst

Okay. Thank you. And Ken just...

Glynis Bryan -- Chief Financial Officer

In our K, it will be in our 10-K.

Matthew Sheerin -- Stifel -- Analyst

Okay great. And Ken just sort of a larger sort of bigger picture question. NetApp last night one of your suppliers talked about seeing weakness from large enterprise customers in January that were sort of skittish to pull the trigger on big deals just because of macro issues. I know you don't comment into the quarter, but have you seen any, I mean, talking to customers in terms of how they're thinking about this year in terms of optimism or their take on their budgets or IT budgets?

Kenneth Lamneck -- President and Chief Executive Officer

Yes, we haven't seen that sort of negativity specifically that was pointed out. I did see your report on that. And I'd say that we're seeing pretty much consistency for what we saw in the last three or four quarters. So there might be isolated cases where NetApp may have seen that, but I wouldn't comment on that as a general comment at this stage.

Matthew Sheerin -- Stifel -- Analyst

Okay. And just lastly for me as you look at into the next year or two as in theory the hardware refresh cycle for servers and PC is low and perhaps flat to down at some point. You obviously have a strong software business and a services business, how are you positioning in that kind of environment in terms of your variable cost reacting to market swings and that sort of thing?

Kenneth Lamneck -- President and Chief Executive Officer

Yes. It's a good question. I think we certainly are very strongly there. We see a lot of things because we're obviously a cloud and data center transformation business as both private cloud -- public cloud really the hybrids of the world. And I think one of the things that's been really in my mind underestimated in the whole hardware world is everything that's going to be occurring with IoT at the edge. I do believe that it's going to be a really significant driver for hardware solutions at the edge where it's not economical to do everything up in the public cloud there are latency issues so on and so forth.

And that's really just starting to emerge and we see that a lot in our Digital Innovation group where we're are the heart and the start of doing these IoT solutions, where in many industries that would have never considered an IT solution that were very analog-based are looking to digital solutions with things like Digital Innovation. And it's driving and will be driving a lot of legally significant sort of a hardware IoT solutions at the edge. So that's an area I think that again the analysts have underestimated. Its building we see it on the frontlines. And I think that will start to become in the next couple of years a pretty significant part of the hardware revenue platform. And if you talk to companies like Dell and Cisco and HPE, they're very, very excited about what that opportunity is.

So we believe that there will be more hardware. It's not all going to go away. It may not be the same footprint server and storage that we see today at the edge, but there'll still be a significant amount of business flowing through there.

But again we're positioned-well because if it goes cloud like we've seen again it go from 30% to 80% a year for us in sort of these cloud services offerings, we're positioned to take advantage of that as well. And that's good for us as it becomes more recurring, we like that model quite a bit as we start to build our managed services offering. So we're bullish on that whole trajectory of where that goes overall.

Matthew Sheerin -- Stifel -- Analyst

Okay, all right. Thanks, Ken.

Operator

We have a question from Kara Anderson, B. Riley FBR. Go ahead, ma'am

Kara Anderson -- B. Riley FBR. -- Analyst

Hi, good morning.

Glynis Bryan -- Chief Financial Officer

Good morning.

Kenneth Lamneck -- President and Chief Executive Officer

Good morning.

Kara Anderson -- B. Riley FBR. -- Analyst

Most of my questions have been asked at this point, but I did just want to touch on whether or not you guys are seeing any impact from the government shutdown or supply shortages that have been I guess called out by some of your competitors.

Kenneth Lamneck -- President and Chief Executive Officer

We feel that it certainly had a little bit of impact. I wouldn't say it was material for us on the shutdown because they've come back to work and they're being -- they're obviously going to fulfill that.

I think the fed business overall was a little bit slow for us and that was mostly mitigated for us by renewals, which we do think are more cyclical and we'll see those we believe start to occur in the back half of this year. So for us we don't think that it's going to have a material impact.

Kara Anderson -- B. Riley FBR. -- Analyst

And on the supply issues?

Kenneth Lamneck -- President and Chief Executive Officer

On the supply issues I think you're referring Kara to the sort of what we see with the Intel chipsets and those type of things. I think we're going to see it hasn't been material for us, it's certainly being constraining. But again I think as you play in the higher end of the enterprise, a lot of these device manufacturers of course are moving more and more of their production toward the higher end where margins are better and so forth versus the lower end of the market. So we're seeing it tight but I wouldn't say it's a material impact to our business. And the work we have is that's probably going to now correct itself completely until call it the end of the second quarter.

Kara Anderson -- B. Riley FBR. -- Analyst

Got it. Thank you.

Operator

(Operator Instructions) Ladies and gentlemen, there are no further questions at this time. The conference is concluded -- disconnect your telephone lines. Thank you.

Duration: 40 minutes

Call participants:

Glynis Bryan -- Chief Financial Officer

Kenneth Lamneck -- President and Chief Executive Officer

Adam Tindle -- Raymond James Financial -- Analyst

Matthew Sheerin -- Stifel -- Analyst

Kara Anderson -- B. Riley FBR. -- Analyst

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