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Insight Enterprises, Inc. (NASDAQ:NSIT)

Q3 2008 Earnings Call Transcript

November 6, 2008, 5:00 pm ET

Executives

Rich Fennessy – President and CEO

Glynis Bryan – CFO

Analysts

Brian Alexander – Raymond James

Matthew Sheerin – Thomas Weisel Partners

John Lawrence – Morgan Keegan

Operator

Good day, ladies and gentlemen, and welcome to the Insight Enterprises Incorporated third quarter 2008 earnings conference call. My name is Michelle and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator instructions) As a remainder this conference is being recorded for replay purposes.

And I would now like to turn the presentation over to your host for today’s conference Ms. Glynis Bryan, Chief Financial Officer. Please proceed.

Glynis Bryan

Thank you, Michelle. Welcome everyone and thank you for joining the Insight Enterprises conference call. Today, we will be discussing the Company's operating results for the quarter ended September 30th, 2008. I'm Glynis Bryan, Chief Financial Officer of Insight Enterprises. And joining me is Rich Fennessy, President and Chief Executive Officer.

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

Today’s call, including all questions and answers, is being webcast live and can be accessed via the Investor Relation section of our website at insight.com. An archive 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 period. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today November 6th, 2008. 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.

Finally, let me remind you about forward-looking statements that will be made on today's call. All forward-looking statements that are made in this conference call are subject to risks and uncertainties that could cause the actual results to differ materially. These risks are discussed in today's earnings release and in greater detail in our Annual Report on Form 10-K for the year ended December 31st, 2007. Insight Enterprises assumes no obligation to update any forward-looking statements.

With that, I will now turn the call over to Rich for opening remarks. Rich?

Rich Fennessy

Thank you, Glynis. Hello, everyone, thank you for joining us today. In the third quarter, the demand environment for IT solutions continued to be very challenging as the overall economy worsened especially in September.

Our third quarter consolidated net sales were $1.2 billion, up 5% year-over-year, and gross profit grew 3%. Earnings from operations were $15 million, down 22% from $19 million recorded in the prior year quarter.

Net earnings from continuing operation were approximately $7 million down from $9 million recorded in the prior year.

Please note that our third quarter 2008 results include $3.3 million pre-tax of net foreign exchange losses resulting primarily from the strengthening of the U.S. dollar against the euro and the British pound sterling during the quarter and the volatility during the period of those exchange rates, compared to $849,000 pre-tax of net FX losses in Q3 2007. These foreign currency losses in Q3 2008 were offset partially by $1.1 million tax benefit recorded during the quarter.

Diluted earnings per share in the third quarter were $0.15 versus $0.18 last year. Our EMEA segment continued to execute well during the third quarter, which resulted in very strong financial results for this segment. Net sales increased 6% to $281.4 million. In local currency, net sales grew across all categories and in all countries in EMEA except Germany. Gross profit dollars grew 17%, and for the third consecutive quarter we saw gross margin increase over 100 basis points year-over-year.

As a result, earnings from operations more that doubled versus last year. So again, we are pleased with the results within this operating segment. We believe we gained market share in the third quarter, which will help better position us to continue to grow profitably in the face of a more challenging economic environment.

In Asia Pacific, while net sales increased 20% to $32.8 million in the quarter, earnings from operations decreased year-over-year due to a decrease in fee-based enterprise agreement sales and increased SG&A expenses we have added to support long-term growth in the region.

Now, on to North America. Net sales in North America segment increased 5% to $855 million in the third quarter. The net sales results of Calence more than offset the high-single digit decline in sales in our legacy hardware business. The software and services categories are performing well, reporting growth of 2% and 126%, respectively, in the third quarter.

As we saw in the first half of the year, pricing continued to be pressured in the third quarter, particularly in our hardware category. As a result, we saw gross profit dollars decline by 2% while gross margin decreased approximately 80 basis points.

Selling and administrative expenses were 11.5% of net sales, consistent with the third quarter of last year. As a result, earnings from operations were down 43%, or $6.5 million in the quarter.

We are very pleased to report that on October 20th, we completed the migration of all of our U.S. hardware and services business to our new IT system. The transition went well and we are currently going through a normal post-implementation stabilization process. As we close out this year and head into 2009, we can now focus on optimizing the system and leveraging to improve efficiency in our front and back office operations and our bottom line.

In this environment we must continue to be aggressive in ensuring we decrease our base cost infrastructure and discretionary spending levels going into next year. As a result of actions we took earlier in the year, expected efficiencies from our systems upgrade project, and additional actions planned for the fourth quarter, we are targeting a year-over-year decrease in the net operating expenses of our legacy North American business in 2009 of approximately $20 million, or about 6%.

We do expect the demand environment to continue to be soft in the fourth quarter. As a result, we expect fourth quarter 2008 diluted earnings per share to be between $0.27 to $0.34 before severance, restructuring, or any other non-recurring charges. The reason for such a wide range is that worldwide the current environment is quite unprecedented, making predictions more difficult. Having said this, we are confident that Insight’s value proposition is compelling to our clients, which positions us well to compete and to grow as me through these challenging times.

Now, I ask Glynis to provide more detail on our third quarter 2008 financial performance across each of our operating segments. Glynis?

Glynis Bryan

Thanks, Rich. Starting with our North America segment, net sales grew by $37 million, or 5% to $854.7 million. This includes the benefit of the Calence acquisition, which we closed on April l. Hardware sales were up 1% year-to-year as sales from Calence offset decline in our legacy hardware business. Software sales grew 2% during the quarter and our services sales were up 126%, reflecting double digit growth in our legacy services business and the addition of Calence to our portfolio.

Gross profit decreased $1.8 million, or 2% to $107.2 million. Gross margin decreased by 80 basis points to 12.5% from 13.3% in the third quarter of 2007, primarily due to market pricing pressures, which have driven down product margin, including vendor funding of 94 basis points, and decreases in agency fees for Microsoft Enterprise software agreement renewal of 44 basis points.

Additionally, increased transportation costs that were not able to be fully passed on to clients resulted in further decrease in margin generated by freight. These decreases were offset partially by an 87 basis point improvement in gross margin resulting from increased sales of higher margin services primarily from our Calence acquisition.

Selling and administrative expenses increased $4.7 million, or 5% to $98.4 million, compared to $93.7 million reported in the prior year quarter. The 2007 third quarter results include $2.5 million in expenses associated with the Company’s stock option review. The benefits of the cost reduction efforts implemented earlier this year, reduced performance based compensation expense resulting from our year-to-date financial performance and lower commission, were offset by increased SG&A from the addition to Calence to our business. Note that Calence generally has higher SG&A as a percentage of net sales than our legacy business.

The North America business reported earnings from operations of $8.8 million, which was down from $15.3 million reported in the third quarter of last year.

Moving on to results for EMEA and APAC, net sales in EMEA increased 6% during the quarter this year. These results include software and services net sales that were up 13% and 57% year-over-year, respectively. Excluding the effect of foreign currency changes during the quarter, net sales increased 7%. We saw a positive growth in local currency across all categories, including hardware and another great quarterly performance by our EMEA team.

Gross profit in EMEA grew $6 million, or 175% while gross margin increased 140 basis points to 14.9% due primarily to an increase of over 90 basis points in product margin, including vendor funding as well as an increase of 50 basis points in agency for Microsoft Enterprise agreement renewal.

Selling and administrative expenses in EMEA increased by $3.3 million year-over-year. The increase is primarily due to increased salaries and wages and other employee-related expenses of approximately $2.5 million due to increases in sales incentive programs and employee headcount. Earnings from operations in EMEA increased 114% to $5.5 million for the third quarter.

As Rich highlighted, our Asia Pacific segment increased net sales by 20% to $32.8 million. Earnings from operations declined year-over-year due in part to change in the mix of business driven by decrease in Microsoft Enterprise agreement renewals and higher SG&A.

Moving on to the tax rate, our effective tax rate for the quarter was 22.2% compared to 40.6% last year. The decrease in the effective tax rate was due primarily to a $1.1 million benefit from federal and state research and development credits recorded during the quarter as well as an increase in the percentage of taxable income in countries of lower tax rates than the U.S.

That concludes my comments and we will now open up the line for questions. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Brian Alexander of Raymond James. Please proceed.

Brian Alexander – Raymond James

Thanks. Just starting with the demand picture in North America, where you just mentioned that it worsened in September. I am wondering if October continued that trend where you saw a continued deterioration year-over-year or have you seen any signs of stability, and if you could also just discuss the general trends in North America between SMB and enterprise?

Rich Fennessy

Sure, Brian. Yes, as we commented on the scripted portion, clearly July and August were stronger than what we saw in the month of September, specifically the middle part of September with all the activity that’s going on in the marketplace, we saw our business really slow down considerably. Going into the October, what we see is continues to be in terms of our run rate business kind of very choppy and in relation to big projects, which really goes to your enterprise question, clearly we are seeing some of those projects still go through, but many more also being delayed or reduced in some sense. So as you look at demand right now in the fourth quarter, which is kind of what we are taking into consideration as it relates to the guidance we put out there, we anticipate the run rate business to be choppy throughout the quarter and as relates to the big projects, I think those are going to be less in the fourth quarter. I think you are going to see a lot of deferrals of those or some cancellations.

As relates to our business today in SMB versus enterprise, our SMB business because as you all recall, we saw softness in our SMB business back in the fourth quarter of last year, in the third quarter of last year relative to our SAP upgrade. We are actually seeing improvements relative to that business as a result of having the system we are now more stable and now fully deployed. So our SMB business, while it’s not booming given the overall market situations is doing okay. And if you look at the enterprise business, we obviously are seeing softness in that. Again it goes back to my comments about the big projects and – because obviously inside the enterprise you have a sum set of our run rate business. We also have a lot of significant projects that drive that business and again what we see is deferral of those, cancellation of those, some cases at least reducing some of those key projects.

Brian Alexander – Raymond James

And just to make sure I understand on the IT, it sounds like you are complete with the bulk of that work as of the 20th of October. I mean have you seen any fall out from that with respect to lost sales or is that basically a non-issue at this point and going forward for the rest of the year?

Rich Fennessy

Yes, on October 20th, we literally moved 100% of our clients and 100% of our business as it relates to the hardware and services business on to the new platform. The warehouse moved over. All of our inventory moved over. So now we are transacting a 100% of that business off the new system. And since then we have not seen any fall off in our system. So while we still have some work to do in to the stabilizing aspects of the experience and doing some final customizations for some of our clients, the transition went well, a heck a lot better than it did last time we did in the third quarter, fourth quarter last year.

Brian Alexander – Raymond James

Okay. That’s great news. On the cost savings side, your previous actions, as I recall, were $4 million to $5.5 million that you were expecting to realize beginning in the third quarter and I think $3 million of that was for North America. So are we going to see an incremental $17 million next year in North America or is it an incremental $20 million? And what – if you could break down that $20 million into buckets, that would be helpful in terms of how much of that’s coming from the system’s wind down versus additional headcounts and other things you are doing there.

Rich Fennessy

Sure. It’s a combination. First of all, it’s – what we try to do is make it easier for everybody and give a net perspective and says hey this year we are going to end up with a certain level of spend inside of our business. We project that spend that absolute number will be $20 million less next year in our legacy North America business. That excludes the Calence business.

Brian Alexander – Raymond James

Okay.

Rich Fennessy

As we try to go bring all the cost savings initiative we had into kind of one easy number for everyone to get an understanding around. Inside of that number – how that number is made up, clearly it takes into considerations actually about $5 million to $7 million of actions that we’ve already take in the first in the first half of the year as well as we’ve talked about in these calls $1 million to $2 million of extra cost that we’ve had each quarter inside of our infrastructure and support (inaudible) system. That leaving our business. As well as additional actions that we have teed up here for the fourth quarter, the summation of all those is what gives us the ability to take $20 million, which is a substantial amount of our infrastructure out as we go into calendar year 2009. So, it’s really bringing all three of those together and try to give you a summary view for what we anticipate the cost structure to look like as we go into calendar year 2009.

Brian Alexander – Raymond James

And I assume that excludes any potential decline in variable expenses related to any potential sales declines next year, this would be all incremental to that?

Rich Fennessy

Correct.

Brian Alexander – Raymond James

Okay. Final one from me. Just on your liquidity situation, everybody is obviously very worried about the credit environment right now and as I look at your balance sheet, I think you had $330 million in debt. I think your revolver and AR facilities (inaudible) provide you with a maximum of $450 million in capacity. So may be if you could just kind of walk us through your situation. And I noticed your inventory is down quite a bit as are your payables at the end of the quarter. So I am just tying into that, wondering if you have sufficient borrowing capacity to buy what you need or perhaps some of the sales weakness you’ve seen is due to lack of available inventory.

Glynis Bryan

No. I’d say that we have sufficient availability to buy what we need. We actually renegotiated a new agreement and renegotiated two of our existing credit agreements, made minor modifications to them in the – in September. And we got a $90 million inventory financing line as a result of that. So that has helped out and we have about $137 million of availability under existing lines as of the end of the quarter, which would be sufficient to meet our working capital needs over the next year.

Brian Alexander – Raymond James

I am sorry, so the inventory facility is a $90 million facility and then–?

Glynis Bryan

The $90 million line, yes.

Brian Alexander – Raymond James

And then the other two–?

Glynis Bryan

(inaudible) at the 450 level.

Brian Alexander – Raymond James

Okay great. Okay.

Rich Fennessy

As relates to the inventory reduction because if you go back over several quarters, we were running our business somewhere around $100 million of inventory in North America and actually we have now been running at a rate of around $65 million. I would attribute that the deployment of our SAP system and the implementation of the MRP module, which lets us automate how we plan the inventory based on sales trends and order histories, so really that’s just an example of us running a much more efficient operation as a result of upgrading and automating our systems.

Brian Alexander – Raymond James

Okay. Thank you. I will get back into queue.

Operator

(Operator instructions) And your next question comes from the line of Matt Sheerin of Thomas Weisel Partners. Please proceed.

Matthew Sheerin – Thomas Weisel Partners

Yes, thanks, and good afternoon, everyone. My first question is with regards to your guidance, which I know, you’ve just given EPS guidance, but to back into that just trying to get a sense of the hardware revenue, specifically North America. Sequentially, last year, you were down slightly and I know part of that was because of the SAP hiccups; in past years you’ve been up a little bit sequentially, but based on the tone of your commentary, specifically as it relates to the enterprise, it sounds like may be it’s best to model reflect it down again?

Rich Fennessy

I think what we saw sequentially in the third quarter versus the second quarter in North America just to go specific to North America, about flattish, I think it was down 1%, and so the hardware is an example. And that really came from a pretty decent July and August and also a week September. As we think about the fourth quarter, I think we anticipate flat to negative in terms of the hardware business based on what we are seeing in just the overall demand environment and the lumpiness we talked about in terms of run rate as well as the big projects. So our mindset going in, which is why we took into consideration the guidance that we did is that we anticipate softness continuing throughout the fourth quarter as relates to the hardware business.

The software business, obviously, this is a big software quarter again. So, first – second quarter is our big software quarter and then the second biggest quarter is obviously the fourth quarter. Our software business continues to do well. I mean it’s not as great as we’d like it to be, but overall it’s doing well and – but we have a lot of work to do here in the fourth quarter in terms of new agreements with our clients. So obviously we are looking to go – have that happen, in the fourth quarter like it has in the past. Whether that it will be a little bit softer than we see in the first quarter, more likely it will. So we try to take that into consideration as well as we put together our guidance.

Matthew Sheerin – Thomas Weisel Partners

Okay. And then on gross margin obviously it should be up because of the Microsoft relationship and the seasonality there, but if you look at just gross margin of the hardware business on apple-to-apples, and also considering that you have Calence now and I know they’ve got better margins, and I would think there would be some seasonality in Calence’s business. Correct me if I am wrong there, but should we assume that gross margin is sort of flattish in your core hardware business or is there – continue to be pricing pressure and you might have to give up a little bit of margin to get some share.

Rich Fennessy

Well, what we’ve seen as we have seen as we’ve caught [ph] out is gross margin deterioration over the last couple of quarters, it was actually all three quarters this years right I think was down 80 basis points in the first quarter year-to-year, I think it was 130 from memory in the second quarter, 80 again in the third quarter. So as we look at it, we anticipate gross margin percent to be down again in the fourth quarter and year-to-year compare perspective. On a sequential basis, third quarter versus fourth quarter, it should be up again given the software mix and how that plays out from a gross margin perspective.

Calence business really doesn’t have seasonality to it anything near what we’ve experienced and enjoy today in our software business. So, there is really nothing – a little bit tied to Cisco’s year-end, which is July, it’s a little bit tied there. But for the most part we don’t see a fourth quarter spike in the Calence business.

Matthew Sheerin – Thomas Weisel Partners

Okay, thanks, that’s helpful. And then just regarding the gross margin and the pricing pressure, at what point are you walking away from deals where you are seeing competitors come in really try to undercut on pricing where it just doesn’t make sense from a profitability standpoint or from a return standpoint.

Rich Fennessy

I mean there is clearly that activity going on out there. I mean it’s a combination of really two factors. It’s one that – just looking at the deal and to say it doesn’t make sense for us to go do this deal based on the margins that would be – come out of the deal based on how our competitors are pricing. Other aspects of it is the vendor contributions to our business. As you know, the supplier reimbursement inside of our gross margins are important to us and they set – they all have different types of programs, revenue, clip levels, things of that nature. And as you – as the – as you have a struggles in terms of getting top line you see less supplier reimbursements. And that’s another negative factor that drives your gross margin down. So I think the combination of pricing pressures in the market as well as just less supplier reimbursements flowing.

Matthew Sheerin – Thomas Weisel Partners

Okay. Understand. And then just turning to Europe from my last question, it sounds like you are taking share doing reasonably well. Of course we are hearing from a lot of suppliers and competitors that Europe is falling of pretty dramatically as well. So what are your expectations for Europe and why have you been able to increase margins even on the hardware side in Europe?

Rich Fennessy

Overall I mean we are pleased with our European business. The team continues to go active very well. You really got to break it down into pieces. I mean, as you look at our U.K. business and the U.K. hardware business, it’s not very dissimilar to what we see in terms of the overall demand in the U.S. that’s clearly softening. What’s happening on the positive side for our business is the software business. And what we are seeing across pretty much all the countries, there is some strong growth in our software business and you got to really go back to what we bought. When we bought Software Spectrum back in September 2006, we bought its enterprise, large accounts, software licensing business, really no small and medium business penetration at all. What the team in Europe has been doing is then investing in each of the key countries and building the tele-sales capability to go penetrate the small and medium business segment, and that strategy has worked out very well for us for two reasons. One is, it’s given us very strong growth. Two, is it also comes up along with very strong margins especially as compared to the enterprise business. So what’s helping us as compared to some of our competitors in Europe is one outside the U.K., we are selling the hardware today and I think the hardware segment is the one that’s feeling the most strain in many of these key countries. Two, is we had a business that was working very well inside the enterprise segment that it was really all net new opportunity for us in the SMB segment as relates to selling software to small and medium and we’ve been able to successfully pull off a strategy and investment plan in that geography to go see some good growth. A combination of that is why I think that business is doing quite well for us. So we are actually I mean basically doubling our earnings as you look at what we just did here in the third quarter on a year-to-year. That’s pretty substantial performance, so I would say I think you made a comment, “you are doing good in Europe,” I think we are doing very good in Europe and really very pleased with the team. Going into the fourth quarter and going into 2009, I do anticipate on the hardware side of the equation challenges to remain and we’ve got to do is continue go leverage our portfolio over there and continue to strengthen on our software business to offset that.

Matthew Sheerin – Thomas Weisel Partners

Okay, fair enough. And then I do agree with you there. And then just a quick question for you, Glynis, on the taxes. What kind of tax rate should we be modeling going forward?

Glynis Bryan

I think you should be looking at what our normal standard is, which is around the 38%-39% range – 37% to 39% I guess I would take because we have a little bit higher mix of European and APAC this year.

Matthew Sheerin – Thomas Weisel Partners

Okay. Okay, alright, thanks very much.

Rich Fennessy

Thanks, Matt.

Operator

(Operator instructions) And your next question comes from the line of John Lawrence of Morgan Keegan. Please proceeds.

John Lawrence – Morgan Keegan

Yes, Rich, could you comment a little bit about – obviously you called out some of the savings and everything for next year and you also talked about APC where you had made some investments and sort of leaned on the operating expenses a little bit. Now you look into ’09, obviously you have some capital allocations that you are looking at. Has that changed at all as you look across segments for capital allocation next year in ’09?

Rich Fennessy

John, we are in the middle of the budgeting process right now, so we are not final, but I would expect it will. I mean as we think about 2009, and obviously it’s difficult to predict the overall market environment just given the kind of unprecedented environment we are living in today, but based on what we do know when we look the marketplace, there are clearly going to be geographies, there are clearly going to be technology that are going to be growing faster than others. There is going to be some technologies that are going to be shrinking on a year-to-year basis. So, as we think about our business going into 2009, we are trying to be very smart and very targeted of how we go put our investments around those areas that can go – drive growth. And where we anticipate weaknesses from a marketplace, how to go manage our cost infrastructure. So, that even in a down market we can still go drive profitability growth on a year-to-year basis. So, there will be some changes next year as related to how we distribute our capital spending across our geographies to go ensure that we go drive the growth, as an example. One is that we are done with our SAP upgrade in the U.S. but we clearly will have much less CapEx in the North American geography next year than we had this year. We will probably have more in Europe and Asia Pacific as we try to go make sure we have the right tools and infrastructure to go support the growth that we want to go after in those geographies. But again, those final details and plans are what we’ll be working out over the next 60-90 days and one of the things we’ll be highlighting as we kind of launch into 2009 in prior fourth quarter earnings calls taking into some of the priorities for 2009.

John Lawrence – Morgan Keegan

Yes. Thanks for the detail. And just to add on to that, would you – obviously with the business being soft in certain geographies, would you go to the next step and you may have sort of addressed it, but would you look at entering another country on weakness [ph] here?

Rich Fennessy

Yes, right now, as we have looked at the geographies and for the most part as I think we highlighted on the last call, we’ve recently entered Russia.

John Lawrence – Morgan Keegan

Right.

Rich Fennessy

And that is – it actually is doing very, very well for us. We have looked at some other countries and that right now our mindset is we probably will not enter any new countries in calendar year 2009 from what we are in today.

John Lawrence – Morgan Keegan

Okay.

Rich Fennessy

If you look at the countries we are in today, I think we are in some key markets. There is a couple of emerging markets that are the obvious ones and we will say, which we plan to be in like Brazil, like India. We are in those countries today in a partnership model where we get a profit sharing based on the partner and us passing leads over to them. So we are participating in those markets, but in as broader way as perhaps we could. As we look at managing our investments and making sure we are prepared to go deal with whatever the market environment plays out to be next year, we probably will not be making investments that actually change that model in those countries, just will – we will look though how we grow those markets with the partners that we have serving those markets today.

John Lawrence – Morgan Keegan

Great. Thanks.

Rich Fennessy

Thank you.

Operator

And your next question comes from the line of Brian Alexander, Raymond James. Please proceed.

Brian Alexander – Raymond James

Yes, just a follow-up on the foreign currency losses, can you just kind of walk thru the dynamics there in terms of what generated those losses and whether there is hedging policies that are being implemented to minimize that in the future and given that the dollar has I think appreciated about another 10% since the end of your quarter, are you baking in more currency losses into your fourth quarter earnings guidance?

Glynis Bryan

So, I guess the reason for the FX losses in the third quarter were related to coming off of the big software quarter in Q2 and the mismatch between receivables and sales that the EMEA team had in euros versus payables that they had relative to Microsoft in U.S. dollars. So that was the big driver in terms of the mismatch in the liabilities between those two. And you are correct that is something that in hindsight we could have hedged and we did not hedge in the third quarter. We are looking at hedging on a going forward basis and there are two different types of hedges. One, which requires you to comply with the FAS 133 accounting rules, which make them somewhat more complicated, so we are going through process of getting that done and then some simpler non-designated hedges that we can implement more in a more timely manner. So we are going through that process. I will just remind you that when you hedge you are taking out an insurance policy and you are making a bet with regard to what you think is going to happen with currencies one way or the other. And if I knew that very definitively, I wouldn’t probably be in this job. But we are looking at that and we will make our bet with regard to what we think, and hedge appropriately with that. We have some continued FX exposure built into the forecast, not at the same level.

Brian Alexander – Raymond James

Okay. And then just on the gross margins in Asia, they’ve been very volatile. In some quarters up a couple of hundred basis points and in the current quarter down about 3.50 year-over-year. What’s the right way for us just to think about the gross margin structure in Asia, going forward?

Rich Fennessy

Yes, I mean, first of all, what drives that in terms of I mean – it’s really the law of small numbers. Given the fact we have 100% of our software business there with majority of the profitability being driven by EACs, which as you know is a 100% gross margin. When you have a good quarter, and you get gross margin percents and when you have an off quarter you have substantial decrease in those gross margin percent. So what we saw in the third quarter and it wasn’t unusual is just a softening of the big EAC’s not having them flow just like they did in the third quarter of last year. And that has flown through in the gross margin percent. As you think about that business going forward I mean really I mean you really do need to plan it quarter-by-quarter, so you can't just go apply a flat percentage just given the nature of the second quarter and the fourth quarter. And I think as you go look at the third quarter results year-to-date this year, I think those are probably pretty good planning assumptions as you look at – just trying to model out what the gross margin percents are going to be. One of the things that also worked great for us in the second quarter as you will recall, we made a decision to invest in – get new resources to after the public sector part of the Australian marketplace in the first quarter. Drove great results in the second quarter, but given the fact it’s an off quarter in the third quarter in Australia from a software perspective, that SG&A also (inaudible) which then obviously drove the EFO [ph] percentages down. That obviously will reverse itself a little bit as we go into the fourth quarter because again that should be another bigger quarter especially as compared to the third quarter.

Brian Alexander – Raymond James

Okay. And Rich I know you are not breaking Calence out of your business any more, but may be if you could just talk qualitatively about how you think the overall networking part of your business is doing. It looks like if I try to back into their revenue, it looks like it was on target from my perspective, so may be any qualitative comments on how that has gone and may be tie that into your overall sales force re-organ, how you that’s gone and whether that’s had any impact on productivity.

Rich Fennessy

Sure. The – let me – two different questions there. So overall networking, Calence as well as MINX, which obviously closed in the quarter, are both doing well as compared to our expectations that we put in place as relates the acquisition plan. The commercial part of Calence’s business is doing very well. We did see some softening in the third quarter relative to public sector, which, as you read in the papers, just some of the state and local governments cutting budgets and things of that nature, find that unexpected. So we are seeing some real strength in commercial part of the business, public sector softening a little bit in the third quarter.

Our organic networking business, both in the U.K. as well as North America did very well outside of the pulling together of Calence. So, overall, as we look at networking, we are still very bullish in that segment and view it as one of our growth opportunities as we go in to calendar year 2009.

As it relates to the sales reorg, obviously we did that in July. So, it’s only been about three months now in terms of implementation, but I would tell you we are very pleased with how we’ve realigned our sales organization for two reasons. One is we think it’s just a smarter way to cover the marketplace in terms of our existing clients, in terms of getting (inaudible) own the relationship and bringing in a specialist whether it’s a networking specialist from Calence or whether it’s a software specialist or the services specialist, so over time go drive the greater share of wallet. But the second thing that we are really starting to see come out of that, which was one of the design points is a much greater focus of driving net new clients because Insight historically has done an incredible job of retaining and maintaining clients relationships and in our enterprise business we are 90% plus in terms of client retention, which I would tell you is outstanding. And our business model has lacked in the past from being as good as we need to be in terms of net new clients. The new reorganization with a dedicated business development team overlying a geographic footprint, market by market, identifying net new opportunities and going after them in a coordinated way. It’s only about 90 days or 120 days into the reorg. We’ve already started to see some very positive signs from that. So, the sales reorg we think, as we go into next year, it will be one of the catalysts for driving improvements in our business on a year-to-year basis. The other catalyst will be the SAP system being done. I mean there is no doubt there has been a huge amount of internal focus throughout this year as it relates to my time, Mark McGrath’s time to everybody in the organization’s time, quite honestly, getting the system done. Having that done and now be able to go focus more aggressively in terms of growing the business will be another positive of Calence as we think about our business going into next year. So, sales reorg going well and Calence and the networking segment overall going well. Still little softening in the public sector of their business.

Brian Alexander – Raymond James

And you are not planning any follow-ons to the IT enhancement as it relates to migrating the software business or the networking business over to the new system or international efforts. As I understand as we go into ’09, that’s basically not going to happen.

Rich Fennessy

As it relates to North America, correct, we are going to continue to go run our North America hardware (inaudible) business now the new instance of SAP and we are going to optimize it, fine tune it throughout calendar 2009. We are going to run our software business of this system we purchased (inaudible) it’s called Icare [ph]. And we are going to let Calence continue to go run off of their system. We are starting the planning in Europe in terms of upgrading that infrastructure. And we are still working through those plans and what that actually means from an implementation perspective and timing of that. But as relates to North America, it’s all about optimizing what we have versus integrating and bringing those systems together.

Brian Alexander – Raymond James

Okay. And then final one from me is that what are your product mix? It was interest to me to see that your desktop business was up 17% in North America, your notebook business was down about 15%.And as we look at Europe you desktop business was up 11% – your notebooks were down 11%. So I guess pretty inverse with what’s going on in the industry and I am just wondering if there is any story behind that or if it’s more coincidental than anything.

Rich Fennessy

No, it’s just jump of the page, as you know. I would tell you it’s really been driven in North America but also in the U.K. off a key transactions actually all within public sector, which has a pretty big third quarter. That all flowed through in the third quarter and they are all desktop opportunities that really inflated that percentage.

Brian Alexander – Raymond James

Got it. Okay, thanks very much.

Operator

(Operator instructions)

Rich Fennessy

Well, thank you all very much for joining today’s call. I mean clearly interesting times we are all living in and obviously as we look at Insight’s business, we shared with you today our results for the third quarter, we shared with you our guidance for the fourth quarter. As we think about our business going forward, we are obviously very pleased with the fact that we diversified geographically because that is helping our results as it relates to our European business really driving some positive momentum inside of our overall business. We are pleased that diversification we’ve driven strategically in terms of moving into the software category and moving into the network category.

One of the things we can all expect in today’s environment and I spent a lot of time talking to clients and CIOs and Directors of IT what they are going to do in today’s environment is they are going to cut cost, they are going to look for efficiency. The question is how are they going to do it. One way they are going to go do it is they are going to consolidate suppliers. They are going to look for somebody coming as their trusted advisor and take over more of their IT spends so they have less people to work with, so they become more efficient and get cost out.

I think Insight is very well positioned to take advantage of that situation given our capabilities in the software space, the networking space, the services space as well as our hardware heritage that we bring to the table. So, as we think about our business going forward, we think we are the partner that our clients are going to consolidate their business around. And that’s the opportunity to stay with them we see and that we are going to be driving for inside of our business.

So, with that said, thank you very much for listening to today’s call. Look forward to updating you on the fourth quarter early less next year. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the presentation. You may now disconnect.

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Source: Insight Enterprises, Inc. Q3 2008 Earnings Call Transcript
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