Insight enterprises, Inc. Q1 2009 Earnings Call Transcript

May.12.09 | About: Insight Enterprises, (NSIT)

Insight Enterprises, Inc. (NASDAQ:NSIT)

Q1 2009 Earnings Call Transcript

May 12, 2009 at 10:00 am ET

Executives

Glynis Bryan - Chief Financial Officer

Rich Fennessy - President and Chief Executive Officer

Analysts

Matthew Sheerin - Thomas Weisel Partners

Nabil Hanano for Brian Alexander - Raymond James & Associates

Operator

Good day, ladies and gentlemen and welcome to the first quarter Insight Enterprises Incorporated earnings conference call. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Glynis Bryan, Chief Financial Officer.

Glynis Bryan

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 March 31, 2009, and the restatement of the company's financial statement as reported yesterday in our annual report on Form 10-K for the year ended December 31, 2008. I am 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 morning and filed with the Securities and Exchange Commission on Form 8-K, you will find it on our Web site at insight.com under our Investor Relations section.

Today’s call, including all questions and answers, is being Web cast live and can be accessed via the Investor Relation page of our Web site 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 Web site for a limited time. This conference call and the associated Web cast contain time-sensitive information that is accurate only as of today May 12, 2009. This call is the property of Insight Enterprises. Any redistribution, re-transmission or rebroadcast of this call in any form without the expressed written consent of Insight Enterprises is strictly prohibited.

In today's conference call certain non-GAAP financial measures will be referenced as we discuss the full year 2008 and the first quarter 2009 net earnings and diluted EPS results. You will find our reconciliation of these non-GAAP measures to our actual GAAP results posted on our Web site on the Investor Relations page. These non-GAAP measures are used by us to evaluate financial performance against budgeted amounts, to calculate incentive compensation, to assist in forecasting future performance, and to compare our results to competitors' financial results. We believe that these non-GAAP financial measures are useful to investors because they allow for greater transparency, facilitate comparisons to prior periods and competitors' results, and assist in forecasting our future performance because they typically exclude items we believe to be outside of normal operating results.

In addition, our annual report contains restatements related to the aged trade credits and to correct previously reported financial statements for other accounting adjustments resulting from a review of select critical accounting policies. The statement of operations for the years ended December 31, 2006, and 2007, and for each of the first three quarters of 2008 contained in our annual report on Form 10-K reflect the restatements and other corrections. All comparisons to the first quarter 2008 are therefore references to the restated first quarter 2008 results as detailed in our annual report. Likewise, full year 2008 results include the impact of the restatements and adjustments made in the first three quarters of 2008 as well as final results for the fourth quarter of 2008.

Finally, let me remind you about forward-looking statements that will be made on today's call. All forward-looking statements that are made on this conference call are subject to risks and uncertainties that could cause our results or actual results to differ materially. These risks are discussed in today's press release in greater detail and in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2008.

With that, I will now turn the call over to Rich to walk you through our first quarter 2009 operating results.

Rich Fennessy

Hello everyone. Thank you for joining us today. We are pleased to be here today to report on two important topics. First our business achieved what we consider to be solid financial results in the first quarter, given the challenging demand environment for IT spend globally. And secondly, we have completed our internal investigation and restatement process and in a few minutes Glynis will go into the effect of that process on our previously reported earnings.

Consolidated net sales were $951.2 million in the first quarter, down 14% from the $1.1 billion reported in the first quarter of 2008.

Gross profit declined 13% to $131.8 million while gross margin improved 20 basis points to 13.9%.

We reported a loss from operations of $7.9 million for the first quarter, which includes $15.9 million of one-time charges. Specifically: one-time items include termination of an equity incentive compensation plan which accelerated a non-cash charge of $5.5 million, $3.5 million net of tax, into the first quarter; legal and other professional fees of $4.1 million, $2.5 million net of tax, associated with the trades credit investigation and restatement quantification; and severance and restructuring expenses of $6.3 million, $4.0 million net of tax, related to resource actions taken in the first quarter and early April.

Comparatively, in the first quarter of 2008, we recorded $1.9 million, $1.1 million net of tax, in severance and restructuring charges.

Excluding the effect of these one-time items in each period, earnings from operations were $8.0 million, down from $16.2 million in the prior year.

On a consolidated basis we reported a net loss of $6.8 million and a diluted loss per share of $0.15 for the first quarter. These results include the items I just highlighted and also include a tax charge of about $600,000 related to the re-measurement of certain deferred tax assets.

Excluding the one-time items in this tax charge, net earnings were $3.8 million and diluted earnings per share were a positive at $0.08.

Our focus on cash flow initiatives continued to yield benefits in the first quarter and as a result we ended the quarter with an outstanding debt of $171.0 million, down $57.0 million from year end.

Cash flow from operations was $96.0 million, which clearly demonstrates our ability to continue to generate cash in this tough market. Again, we believe these financial results are solid given the continued softness in the global IT demand environment. As it relates to the demand environment, we were pleased to see a leveling off of the downward trends in demand in the month of March as compared to the first two months in the quarter. This level of demand has continued into April, which is encouraging.

But the good news is that we don't feel that the market is getting worse at this stage. And while we don't anticipate significant uptick in demand in 2009 we believe the aggressive cost actions we have taken across our business will allow us to continue to drive improvements in our profitability throughout the year, even at this reset level of demand in the marketplace.

Throughout the first quarter our operational focus has been on three key aspects of our business, specifically: reducing our cost structure; increasing our debt level; and aligning our sales execution efforts to go after identified areas of growth in client spending. Let me briefly discuss each of these areas.

As it relates to our cost structure, across the world we have taken actions to better align our costs to the demand environment and as a result we anticipate we will have year-to-year declines in our cost structure in all geographies. Our cost actions have been most aggressive within North America. We expect year-to-year expenses to be down approximately $65.0 million, or over $75.0 million if we normalize 2008 spend for the Calence acquisition that closed on April 1, 2008.

This level of reduction was driven by several actions, including merging our corporate and North America executive and back office operations, reducing team mate-related benefit costs, eliminating discretionary spend items, and downsizing the workforce by over 500 team mates between our November and April resource actions.

The good news is that these actions are behind us and while a portion of our actions are tied to variable costs, over 80% are fixed-cost reductions within our business.

The next focus area had been on reducing our debt levels to increase our overall flexibility. While we believe we are acceptably leveraged today, we have been actively working to drive improvements in our cash generation by reducing inventory levels, reducing capital expenditures, and improving our overall cash conversion cycle.

As we highlighted earlier, these activities resulted in a reduction of $57.0 million in our long-term debt during the quarter and we had $67.0 million of cash on our balance sheet at the end of the quarter.

As we look out, we believe we will continue to generate strong cash flow in the second quarter and while we typically use more cash in the second half versus the first half of each year, we do expect to report a significant reduction in our year-ending debt balance versus December 31, 2008.

Finally, the team has been focused on driving targeted sales efforts in those spending areas within our clients' environments that are growing. Specifically, our strategy over the last several years has been on building out a robust set of services capabilities and in today's environment this strategy has proven to be successful as more and more of our clients are looking to leverage our services to help them reduce costs and improve efficiencies.

In addition, as you have all seen in the press, a portion of the stimulus funds being released to the states is being targeted towards improving the IT infrastructure across many public sector institutions. To help us take advantage of this opportunity, Insight was recently awarded access to the U.S. Communities Contract, which is a nation-wide purchasing cooperative for local and state government agencies, school districts, higher education, and non-profits.

Today more than 36,000 public agencies utilize the U.S. Communities Contract and suppliers to procure more than $1.3 billion in products and services annually.

As a result of our award, Insight will now be able to compete for their technology spend across our entire portfolio of products and services.

Though again, we are seeing improvements across each of these three focus areas and our business in total and believe we are well-positioned to compete going forward in the new demand environment.

Now moving on to the individual segments. Net sales in North America declined 13% to $660.1 million. Hardware sales declined 25% as incremental sales from our acquisition of Calence were more than offset by declines across other hardware product categories. Software sales were flat year-over-year and sales of services were up over 90%, reflecting both the acquisition of Calence and overall strength in our services business.

Gross profit declined 8% to $93.0 million but gross margin increased to 14.1%, up 80 basis points year-over-year, reflecting improved margins in our services category partially offset by decreases in freight margin.

North America selling and administration expenses in the first quarter included $8.2 million of charges related to the North America portion of the one-time items I discussed earlier. Excluding the effects of these items, selling and administrative expenses were down $5.0 million compared to last year, or 5%, reflecting the cost reduction initiatives we have implemented over the last several quarters and lower variable costs, partially offset by $13.0 million in incremental expenses from the acquisition of Calence, which were not included in our 2008 first quarter results.

Our North America segment also recorded $5.9 million in severance and restructuring charges during the first quarter compared to $1.0 million recorded last year. As a result, our North America segment reported a loss from operations of $7.9 million. Excluding the effect of one-time items, this segment regenerated positive earnings from operations of $6.1 million.

Net sales in our EMEA segment were $270.7 million in the first quarter, down 15% in U.S. dollars, though in constant currency terms, net sales were up 8% over the first quarter of last year.

Net sales in EMEA were $270.7 million in the first quarter, down 15% in U.S. dollars. In constant currency terms, net sales were up 8% over the first quarter of last year.

Our business in the U.K. performed well during the first quarter with hardware sales down only 2% in local currency year over year, while the U. K.-based software and services businesses grew 51% and 186% in local currency respectively. Across the rest of the EMEA region, net sales were up 2% in local currency.

Gross profit was down 23% in U.S. dollars and down 3% in constant currency terms. Gross margin declined 140 basis points to 13.3% due primarily to decreases in product margin, including vendor funding, partially offset by an increase in services margin.

Selling and administrative expenses in EMEA in the first quarter included $1.4 million of charges related to the EMEA portion of the one-time items I highlighted earlier. Excluding the effect of this items, selling and administrative expenses in EMEA were down $5.9 million year-over-year in U.S. dollars and in constant currency terms selling and administrative expenses in EMEA increased by $1.5 million year-over-year.

The increase is primarily due to increased wages, salaries, and facility-related expenses due to increases in employee headcount.

EMEA also recorded $417,000 in severance and restructuring expenses in the quarter. As a result, our EMEA segment reported earnings from operations of approximately $581,000. Excluding the effect of one-time items, this segment generated earnings from operations of $2.4 million.

In Asia/Pacific, net sales were $20.3 million, down 12% from the prior year. Gross profit of $2.8 million was down approximately $940,000 year over year, while gross margin of 13.9% was down from 16.3% for the same period. These declines are primarily related to lower fees from enterprise software agreement renewals and to the increased mix of public sector business, which is typically transacted at lower margins.

Due to response to lower financial performance in the market environment we have started to implement a set of actions to reduce our cost structure in this geography to help maximize profitability on lower levels of demand.

Glynis will now take a few minutes to discuss the effect of the restatement associated with aged trade credits, the results on related internal accounting review, and the impairment charges recorded by the company in 2008.

Glynis Bryan

In our press release on February 9, 2009, we reported that our internal review had identified errors in the company's accounting for trade credits in prior periods dating back to 1996. The internal review encompassed aged trade credits, including both aged accounts receivable credits and aged accounts payable credits arising in the ordinary course of business but were recognized in the company's statement of operations prior to the discharge of the underlying liabilities under applicable domestic and foreign laws.

We initially estimated a restatement range of $50.0 million to $70.0 million related to these aged trade credits. In our annual report on Form 10-K filed yesterday, the cumulative restatement charge covering the period from December 1, 1996, through September 30, 2008, related to the trade credits is $61.2 million, or $37.7 million after taxes.

The resulting liability, recorded in accrued expenses and other current liabilities in the company's balance sheet as of December 31, 2008, is $59.4 million.

Our statement of operations for the years ended December 31, 2006, and 2007, and for the quarters ended March 31, June 30, and September 30, 2008, contained in our 2008 10-K, have been restated to reflect approximately $9.5 million, $10.2 million, $2.8 million, $2.2 million, and $1.3 million respectively of increases in cost of goods sold for the respective periods related to aged trade credits.

There is no restatement in the fourth quarter of 2008 related to aged credits.

We have also made appropriate entries to increase cost of goods sold for the years ended December 31, 2004, and 2005, and to reduce retained earnings in December 31, 2003, for the cumulative after-tax effect of the aged trade credits for the years prior to 2004.

We expect that the final settlement of these liabilities with our clients and our partners and ultimately with the states and/or other regulatory bodies, may take multiple years and may be settled for less than the estimated liability. However, we cannot provide any assurances that the final settlement will be materially lower.

Over the coming months we will continue to work with our external advisors to develop and implement the process to evolve the aged credits with effective parties and to comply with the state level unclaimed property laws.

In conjunction with our identification of errors in the accounting for aged trade credits, the company, under the oversight of the audit committee of our board of directors, conducted a factual investigation. The company and the audit committee engaged independent external advisors, including legal counsel and forensic accountants.

The investigation determined that interviews, document reviews, and forensic analysis did not indicate intent to manipulate the company's accounting or financial results.

In addition, as of December 31, 2008, we have identified a material weakness in our internal control over financial reporting related to the proper disposition, reconciliation, monitoring, and consequent accounting for aged trade credits.

Subsequent to December 31, 2008, we have begun taking steps to remediate the material weakness and have implemented, or are in the process of implementing, internal control improvements in several areas. However, certain of the actions that we expect to complete will require additional time to be fully implemented or to take full effect.

Accordingly, thorough mediation of the material weakness has not yet been completed. We anticipate that we will complete our remediation by the end of this year.

Moving on to the results of our accounting review, our annual report on Form 10-K also included other miscellaneous accounting adjustments as a result of a review of select critical accounting policies. The aggregate impact on net earnings from continuing operation in the years ended December 31, 2006, and 2007, was $1.5 million and $1.7 million respectively. The cumulative effect on net earnings in the first three quarters of 2008 was $1.0 million.

We do not consider the effects of these adjustments in any single quarter to be material and the 2008 10-K includes the details of the impact in each quarter in 2007 and 2008.

In brief, the adjustments relate to the following areas: one, adjustments to recognize hardware net sales based on delivery dates versus shipping dates due to our general practice of covering losses while goods are in transit; two, adjustments to recognize stock-based compensation expense associated with performance based with restricted stock units granted with graded vesting on an accelerated versus a straight-line amortization schedule; three, adjustments to capitalize interest on internally used software development projects in prior periods and recorded related amortization expense thereon; and four, adjustments to reclassify vendor consideration that exceeds the specific incremental identifiable cost of shared marketing expense program to reflect such excess consideration as a reduction of cost of goods sold instead of a reduction of related selling and administrative expenses.

This adjustment had no impact on reported earnings from operations in any period.

In addition, there was one adjustment that affected discontinued operations. Specifically, we allocated a portion of our North America goodwill not previously allocated to the carrying amount of the division we sold in March 2007 in determining the gain and sale.

This adjustment reduced the gain on sale of the discontinued operation recorded in the three months ended March 31, 2007, by $2.7 million, or $1.6 million net of tax. This gain is included in earnings from discontinued operations.

And finally, the impairment charges. In our February 9, 2009, conference call we indicated that we had a goodwill impairment in North America of $9.0 million related to the Calence acquisition earn-out that was recorded in North America subsequent to the second quarter of 2008. We did not, at that time, expect to have impairment in EMEA or Asia/Pacific.

Given the sustained and significant decline of the company's share price, which continued beyond December 31, our final analysis concluded that the goodwill in both EMEA and Asia/Pacific was impaired. As a result, in addition to writing off the $9.0 million of goodwill in North America in the fourth quarter 2008, we wrote off all the goodwill in EMEA and Asia/Pacific for a total charge of $83.0 million, $76.0 million net of tax.

You may remember that we wrote off $314.0 million of goodwill in the second quarter of 2008, which represented all the goodwill related to our North American operation at that time. For the year ended December 31, 2008, we have written off a total of $397.0 million of goodwill, or $277.0 million after tax.

In addition, in the fourth quarter we determined that certain foreign tax credits were impaired because we now believe that it is more likely than not that the future tax benefits from these credits will not be realized. As a result, we established an evaluation allowance of $8.7 million to reflect this decision.

With the filing of our 2008 10-K and the expected filing of our Q1 2009 report on Form 10-Q on, or before, May 15, we will be current in all our filings with the Securities and Exchange Commission and with NASDAQ and we will also be in compliance with the covenants in our credit facilities.

I will now turn the call over to Rich for his closing comments.

Rich Fennessy

We had previously provided our perspective on 2009 based on preliminary full-year 2008 results before severance and goodwill impairment charges. Final 2008 full-year EPS results was a diluted loss per share of $5.15 including restatements and adjustments resulting from our internal review.

These results include the $277.0 million of after-tax goodwill impairment charges, $5.7 million of severance and restructuring expenses net of tax, and the $8.7 million increase in foreign tax credit reserves. Excluding these items, adjusted full-year 2008 diluted earnings per share was $1.10.

We believe that with the demand levels where they are and with the resource and other actions we have taken over the last several quarters, that diluted earnings per share will be between $0.80 and $0.87 for the full year of 2009 with more of the earnings coming in the second half of the year compared to the first half.

This outlook does not include the impact of any severance and restructuring expenses, expenses associated with the restatement investigation and administration or related litigation, or other one-time charges.

This estimated range does include, however: our expectation of a weak hardware demand environment; the projected negative impact of known rebate program changes from our key software partner, which we now project will result in a $20.0 million to $25.0 million reduction to gross profit in 2009, mostly in the second and fourth quarters given our strong software mix in those quarters; and the offsetting benefits of the aggressive cost reduction actions taken to date.

In summary, we are very pleased to have the restatement process and investigation behind us. Our first quarter financial results were solid in this environment and while we expect the balance of 2009 to continue to be challenging, we believe we have the right business model, the right team mates, a strong balance sheet that will position us well throughout the balance of 2009 and into 2010.

That concludes my comments. We will now open the line for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Matthew Sheerin - Thomas Weisel Partners.

Matthew Sheerin - Thomas Weisel Partners

Rich, your commentary on the demand front, it sounds like you are talking about more stabilized order trends in March and that continuing into April and certainly several competitors and distributors have said the same thing. Are you seeing a return to seasonality in most of your businesses or just kind of flat here and you're not sure yet whether there's real seasonal trends kicking in?

Rich Fennessy

I think it just flattened out in March and turned into April. Now I think there are going to be seasonal trends relative to aspects of the business. For example our software business, which as you know, has a stronger seasonal second quarter and fourth quarter versus what we would see typically in the first quarter and third quarter.

Matthew Sheerin - Thomas Weisel Partners

And it sounds like your expectations for hardware are still subdued.

Rich Fennessy

Yes, I think the hardware demand environment throughout the year, our expectation right now will be relatively flat from what we're seeing in March and April. I don't think it's got the trend downward that we saw in April and February. My point was that we see that now leveling off and our expectation is that it play out roughly flat from what we saw in March and April throughout the rest of the year.

Matthew Sheerin - Thomas Weisel Partners

And then, in terms of your guidance for the year, which I appreciate is probably hard to do at this point, you gave us sort of bottom line expectations, but what do you need to do whether the revenue range, gross margin, op ex kind of range to get to that $.80 to $0.87?

Rich Fennessy

As you said, obviously it is challenging to give guidance in the environment that we've been in over the last several quarters, but in the interest of transparency to our investors we felt it important to give our best view based on the factors that we see today inside of our business as well as the market in total, so hence the guidance that was laid out there, which is as you know, is relatively consistent with the guidance, it's actually pretty much the exact same, as the guidance on our last call.

And obviously what we've seen since the last call is a much softer January and February so hence we had to get very aggressive from a cost action perspective to go offset that to still be able to maintain the guidance that we put out there.

In terms of our assumptions, going forward, clearly inside the business we are going to continue to go leverage the lower cost structure that we have now put in place in our business, which I think is going to be the biggest factor is just a lower SG&A percent that we will see in the second quarter throughout the rest of the year as a result of the cost actions that we have taken.

As we look at the other assumptions that get there, I mean clearly we don't anticipate from a top line perspective material growth and change in our hardware business, from what we have experienced so far. Now if that happens that will be a good thing but really our expectation is not material growth there.

We have obviously taken into consideration the seasonality of our software business in Q2 and Q4 relative to our services business. As I highlighted in all geographies that business is doing well and we expect that to continue to do well throughout the remaining quarters of the year. And I think it's really logical if you look at it, many clients in today's environment are not necessarily deploying new hardware assets, as an example, but they are figuring out how they get more useful life out of the ones they have or do a better job of managing the cost of managing those assets and their environments and they look to Insight as a services partner coming in to help them do that.

So those are some of the assumptions that we took into considerations without getting into the details of what our exact expectations are by category for the rest of the year or gross margin improvement assumptions.

Matthew Sheerin - Thomas Weisel Partners

And then so are you expecting, I know you've got some additional cost cutting that you did in the quarter, so are you expecting SG&A natural dollars to continue to come down in June or will they be up on the expenses related to the seasonal trends you see in your software business?

Rich Fennessy

Clearly because some of the resource actions didn't kick in until the early part of April so we will clearly see the benefit of that in the second quarter as compared to the first quarter. And we're still evaluating additional actions and aspects of our business, specifically our international business as we look to Q2, specifically the EMEA and Asia/Pacific, as I highlighted on the call.

We have been most aggressive in North America. We have taken some actions in our European operations and minor actions in Asia/Pacific. We will look at some additional actions here in the second quarter potentially as we kind of look to see how the trends are playing out, which would be further reductions in our SG&A structure.

Operator

Your next question comes from Nabil Hanano for Brian Alexander - Raymond James & Associates.

Nabil Hanano for Brian Alexander - Raymond James & Associates

I had a question regarding the accounting issue. Are there going to be any material costs for resolving the $61.0 million in trade credit disputes, which you stated could take multiple years?

Glynis Bryan

I think that what we are anticipating is that in the second quarter we will have some incremental kind of unusual expenses associated with just the process of wrapping up the investigation and getting to the final restatement numbers. And right now we are estimating that that is going to be in the range of $2.0 million to $2.5 million.

On a go-forward basis we do have three lawsuits filed out there and it's unclear where they're going to go so I don't have any estimate with regard to what ligation expenses would be.

But the actual administration on a go-forward basis, outside of the $2.0 million to $2.5 million is not going to be a significant number as we put the process in place with regard to administratively how we handle the filing of our proxy logs and settling up with partners and clients.

Nabil Hanano for Brian Alexander - Raymond James & Associates

In your press release you stated that the projected negative effect of the changing software rebates is now expected to be $20.0 million to $25.0 million. I believe that's up from originally $15.0 million to $20.0 million and I just have three questions regarding that. Why did the negative effect of the rebate change increase? How confident are you that it won't get worse in here? And are you still thinking that you will be profitable in the software business this year?

Rich Fennessy

On the last call we did highlight it. It was more $10.0 million to $15.0 million. It was actually up $10.0 million versus the last call when we highlighted some program design changes. And really what drove the increase of $10.0 on that specific range was just some additional program design changes that came out, divisional changes since our last call which drove the extra $10.0 million of what we think will be a GP reduction on a year-to-year basis.

Clearly there is always the risk of additional changes and additional negative impact. Right now based on all the information we have, that's our best view. And given the fact that such a material impact or material change, in terms of the program design and the impact of what having our businesses is why we call out that number specifically.

Relative to the overall profitability of our software business, yes, we continue to be confident we can direct profitability in our business. While this is a big number, we still have a very large software business and we believe we can go direct profits from our overall software business on a worldwide basis.

Nabil Hanano for Brian Alexander - Raymond James & Associates

It looks like your DSOs were up pretty substantially. Going forward how should we think about bad debt expense or reserves, given the uptick?

Glynis Bryan

I think that we have an adequate bad debt reserve. We haven't seen any deterioration in our portfolio with regard to bad debt or customers in the [audio break] environment. We keep a close eye on it as we look forward so I don't think you should envision that there's going to be an uptick in our bad debt reserve overall.

Operator

Your next question is a follow-up from Matthew Sheerin - Thomas Weisel Partners.

Matthew Sheerin - Thomas Weisel Partners

Your commentary about the headcount reduction, I think you said it was down 500. What is the actual number out and were any sales jobs impacted, and if so is that going to be a distraction at all for your business?

Rich Fennessy

I don't know if I have the exact headcount number in front of me in terms of where we ended, so we'll have to get back to you.

As we looked at the headcount reduction plans, specifically in North America, we looked across all departments, all aspects of the business, obviously tried to look for where we could get some synergies from our SAP deployment that got completed the end of last year in terms of improved profits to give us less back office expense associated with the new system. So that was a primary focus area as we went and looked at finding ways to reduce our headcount.

But, yes, there was sales headcount reductions as part of it. Specifically what we looked at is just underperforming resources so it's more of your classic performance management type exercise of trying to go look at those obviously not impacting your top or your medium performers by identifying your lower performers and including them in the reductions that we've had.

As we have look at our now resulting sales headcount we believe we have the right level of headcount in this demand environment. As we do see strengthening in the demand environment, and right now our expectation is that would be more of a 2010 statement versus 2009 statement, we would then see the desire in our business to grow back our sales team. But at this point in time we think we have the adequate sales team size to address the market demand that we see, both in North America as well as EMEA and Asia/Pacific.

Matthew Sheerin - Thomas Weisel Partners

On the balance sheet, the cash position, does any of that have to be reserved for the cash settlements related to the accounting issues?

Glynis Bryan

No, none of that cash has to be reserved for any settlement of the trade credits.

Matthew Sheerin - Thomas Weisel Partners

But that's just sitting on your balance sheet as a liability then?

Glynis Bryan

Yes. It's sitting under liability and current liability, that's where you will see it on our balance sheet.

What I will say is that under our ABS facility we will take a haircut, we will reduce our availability under our ABS facility for the overall settlement of the trade credits and as the trade credits settle out, that will increase the availability under our ABS facility. And it's not the full $61.0 million that would be associated there, it would be just over $45.0 million, which is a specific AR-related portion and the ABS facility clearly looks at our underlying receivables with regard to the collateral. That's where we're going to carve out and use our availability under the ABS [facility] as we settle out the credit and it frees up the capacity in the line again.

Matthew Sheerin - Thomas Weisel Partners

Regarding your relationship with, well, your Microsoft business basically. So with these lower margins, is that something that you think is just going to be forever or is that temporary, is that something that you can negotiate? And then second, I know it's early to tell, but do you see any opportunities with Windows 7 coming as any sort of catalyst either for software business or for your hardware business as well?

Rich Fennessy

Yes, on the first point, the relationship with all of our partners, actually, is doing well, as well as our key software partners. I mean, the realities as you look at the economic environment, many of our partners have had to go look at reducing or adjusting the structures of their general incentive programs. And we have some who have done the exact opposite, have actually increased their general incentive programs, which is a good thing.

As it relates to our largest software partners, you will look at what Microsoft is doing. I do believe it's a resetting of the overall amount of earnings optioning in the design of their program. Now the reality is you can go offset those design impacts by higher gross of that category of products in selling, which is clearly what our focus is, and clearly you need a catalyst to go drive higher growth rates and I think System 7 would be an example of a catalyst.

And if you look at the rest of the product line, specifically coming from Microsoft, we are very encouraged by the product road map in terms of the new technologies that they have slated for their next fiscal year. As we look at that that will be one of the ways we can drive higher growth in our software business to go offset them, the impact over time. I think that is going to take some time to go offset that impact but we do believe there are opportunities to do that, over time.

Operator

There are no further questions in the queue.

Rich Fennessy

I thank you all for joining in today's call. Clearly a lot going on in our business and the marketplace in total, as I said on the call. We are pleased with how we finished up the first quarter from getting the restatement process behind us as well as delivering solid financial results. We have obviously been aggressive across our business in terms of adjusting our cost structure in the demand environment and clearly we have our plans in place to go after, try and go drive improvements in our business each and every quarter as we go through calendar year 2009. So I look forward to sharing with you our second quarter results as we complete those.

Operator

This concludes today’s conference call.

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