Ingram Micro, Inc. Q3 2009 Earnings Call Transcript

| About: Ingram Micro (IM)

Ingram Micro, Inc. (NYSE:IM)

Q3 2009 Earnings Call

October 29, 2009 5:00 pm ET


Ria Carlson – Senior Vice President Strategy and Communication

Gregory Spierkel – Chief Executive Officer

William Humes – Chief Financial Officer

Alain Monie – Chief Operating Officer


Craig Hettenbach – Goldman Sachs

Brian Alexander – Raymond James

Matthew Sheerin – Thomas Weisel Partners

William Fearnley – FTN Equity Capital

Ananda Baruah – Brean Murray


Welcome to the Ingram Micro third quarter earnings conference call (Operator Instructions) I now I’ll turn the call over to Miss Ria Carlson, Senior Vice President Strategy and Communications Officer.

Ria Carlson

Good afternoon everyone. Joining me today are Greg Spierkel, our Chief Executive Office, Alain Monie, our Chief Operating Officer and Bill Humes, our Chief Financial Officer. Greg will provide an overview of the third quarter followed by Bill with the financial review. We’ll then turn it back to Greg to provide business highlights and his thoughts about the future. Alain is available for questions at the end of the call and to provide more color about our operations.

The financial portion of this call is accompanied by presentation slides which can be found with today’s news release at the investor relations section of the Ingram Micro website at or by calling 714-382-2015.

Before we get started I have a safe harbor announcement. During today’s discussion, we will make statements that are forward-looking. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties. Please refer to today’s news release and documents filed with the Securities and Exchange Commission, specifically the list factors listed in Item 1-A of our Form 10-K for the fiscal year ended January 3, 2009 for more information on the risks that could cause actual results to differ materially.

This conference is the property of Ingram Micro and may not be recorded or rebroadcast without specific written permission from the company. The presentation slides and a replay of the call will be available for one week on the company’s website at or by calling 800-678-3180.

Now I’d like to turn the call over to Greg Spierkel, our Chief Executive Officer.

Gregory Spierkel

Good afternoon everyone. The third quarter ended with a sense of optimism for both the overall economic environment and our own business. Demand for technology products and services improved over the last six months and our efforts towards greater customer engagement started to generate results.

Sales grew 12% sequentially, the greatest increase in nine years and substantially better than historical seasonality even after adjusting for the three points of favorable currency translation impact. The year over year decline of 11% is less pronounced than the declines earlier this year. Driving profitable sales growth at or above market rates will be a key priority in the coming quarters.

The improved sales performance was enhanced by forging stronger relationships with our vendors and our resellers, quicker and more open decision making on new transactions and a renewed energy in our sales force.

We were also flexible in our sales and account mix which dampened the gross margin compared to last quarter’s six year high. We maintained gross margin stability on our year over year basis, remaining above our stated floor of 5.4%.

We held the cost despite the sequential rise in revenues. Operating expenses declined from both the second quarter and prior year period and the sequential expense ratio improved significantly. We are also approaching the end of the expense reduction plan that we announced earlier this year.

Coupled with the program announced last year, aggregated annual savings relative to the first quarter of 2008 should be approximately $140 million as we enter next year, creating a more streamlined cost structure designed to leverage operating performance.

Working capital management remained best in class. Working capital days at 20, were favorable to our target range of 22 to 26 days. In the coming quarters, we may selectively use working capital to drive sales and better relationships with our customers and vendors, but we do not intend to veer from our target metrics. Cash on hand remains above $1.2 billion, a strong position that affords us the opportunity to invest in growth, improvements and innovation.

We’ve made good progress this quarter with profitable sales performance as our top priority. Our enhanced sales efforts and more supportive economy and the operational improvements we have made over the last 18 months will set us on a path to stronger financial returns.

While growth is important, we will remain focused on maintaining gross margins, containing costs and managing working capital.

I’ll now pass the call to Bill for more detail on our financial performance.

William Humes

I’ll begin with sales, which reached $7.38 billion as indicated on Slide 3. This represents an 11% decline from the prior year with the impact of currency translation having a 3% negative effect. The weak world wide economies along with our previously discussed steps to improve operations and protect profitability dampened sales compared to the prior year. The rate of decline however, has improved compared to earlier in the year.

As Greg mentioned, sales increased 12% sequentially as demand improved and we initiated company wide efforts to re-engage with existing and new customers. Foreign currency translation had a positive impact of 3% sequentially.

On a regional basis, North America sales were $3.22 billion or 44% of total sales. The year over year decline of 10% was the lowest this year. On a sequential basis, sales increased 17%. Media sales were $2.15 billion or 29% of total sales, a decrease of 16% from the prior year with 6% due to the negative impact of currency translation.

The year over year decline is the lowest we’ve experienced since the third quarter of last year. Sequentially sales outperformed historical seasonality.

Asia Pacific was our strongest performing region this quarter with sales of $1.64 billion or 22% of total sales, a year over year decrease of 4%. The translation of foreign currency had a 5% negative impact.

Latin America generated 5% of total sales or $373 million, down 13% versus the prior year with substantially all of the decrease attributable to the negative translation impact of relatively weaker regional currencies.

Gross profit shown on Slide 4 was $401.9 million or 5.44% of total sales. As Greg described, gross margin was within three basis points of the prior year, but declined sequentially from last quarter’s particularly high levels. Pricing conditions remain competitive but stable in most countries.

Operating expenses declined by $42 million or 11% in line with the year over year sales decline. Approximately $12 million of this decline is a result of foreign currency translation impacts.

Expenses decline sequentially despite double digit sales growth as we continued to garner benefits of our expense reduction initiatives. As depicted on Slide 5, third quarter expenses were $338.7 million or 4.59% of sales including costs of $8.4 million or 11 basis points of sales related to our expense reduction program.

In the year ago period, operating expenses were $384 million or 4.59% of sales included $4.1 million or five basis points of sales in expense reduction program costs.

On Slide 6 you’ll see that world wide operating income was $66.2 million or 86 basis point of sales which included cost of sales of $8.4 million or 11 basis points of sales related to expense reduction programs mentioned previously.

This compares with operating income of $72.5 million or 87 basis points of sales in the prior year period which included $4.1 million or five basis points of sales related to expense reduction programs.

In North America, operating income was $30.4 million or 94 basis points of sales including expense reduction program costs of $7.1 million or 22 basis points of sales. In the prior year quarter, operating income was $45.5 million or 127 basis points of sales including $700,000 or two basis points of sales in expense reduction program costs.

EMIA operating income was $13.6 million or 63 basis points of sales which included expense reduction program costs of approximately $600,000 or three basis points of sales. This represents an 81 basis point improvement from last year’s third quarter when the region recorded an operating loss of $4.7 million or 18 basis points of sales which also included $3.1 million or 12 basis points of sales in expense reduction program costs.

Asia Pacific operating income was $21.4 million or 131 basis points of sales including $700,000 or four basis points of sales in expense reduction program costs. In the prior year quarter operating income was $25.4 million or 149 basis points of sales which included $300,000 or two basis points of expense reduction program costs.

Latin America operating income was $4.7 million or 127 basis points of sales. In the prior year period, operating income was $6.6 million or 154 basis points of sales.

Other expenses for the quarter were $6.8 million compared to $12.2 million in the prior year primarily driven by higher net cash levels and lower average interest rates. The effective tax rate for the quarter was 25% compared to 23% in the third quarter of 2008.

Net income was $42.3 million or $0.25 per diluted share. The after tax impacts of our expense reduction programs was approximately $0.04 per share. In the prior year period, net income was $46.4 million or $0.27 per diluted share which included an approximate $0.02 per share impact from expense reduction program costs.

Please turn to Slide 8 for a discussion of our strong balance sheet which is an important competitive advantage in this environment. Cash totaled more than $1.2 billion reflecting the team’s diligent management of working capital and cash flow within the counter-cyclical nature of our balance sheet. Debt levels decreased $43 million from the end of 2008 to $436 million.

On Slide 9 you’ll find our working capital metrics at quarter end. Days of sales outstanding were 39, three days higher than a year ago. Days of inventory outstanding were 29 on par with third quarter 2008, and days of payables outstanding were 48 versus 43 a year ago. This brought working capital days to 20, once again below our targeted range of 22 to 26 days. Finally, our debt to capitalization ratio was 13% versus 15% at the end of 2008.

That concludes my overview of the quarter. Now I’ll turn it back to Greg for a discussion of regional highlights and closing comments.

Gregory Spierkel

Before I begin my regional review, I’d like to take a moment to discuss the importance of our operational improvements over the last several quarters. Our hard work in creating a leaner infrastructure, improving under performing operations and pursuing more profitable accounts, sets the stage for greater operating leverage as top line growth returns.

Every region had a hand in making these improvements and they will also work together to drive growth. We’ll use a variety of tools to generate sales from quicker decision making to more flexibility of working capital, but the focus will always be on helping our vendors and customers succeed. This is a global effort occurring now in every region.

Let me give you a bit more color on the individual regions starting with North America. Our efforts to drive growth had a significant impact in North America with sequential sales increasing 17%. This exceeds historical seasonality as the region’s third quarter sequential growth over the last five years has ranged from 2% to 9%.

On a year over year basis, sales declined more than we’d like, but the pace has moderated. IM logistics, secure matrics and our classic distribution business held up fairly well while sales in Canada and the data capture point of sales operations lagged the regional average.

ABIT continues to be negatively affected by weak consumer sentiment and the soft housing and the closure of ten under performing branches earlier this year helped profitability but had a negative impact on sales.

As the region concentrates on growth, the sophisticated tools it has developed in business and predictive analytics will play a key role. With these capabilities, we’re able to create targeted and customizable demand generation programs for our resellers and vendors.

For example, we recently used predictive tools to help a large VAR better understand its end user customer needs and win a multi-million dollar deal. We’re also employing these opportunities to build the U.S. stimulus package, providing leads and council to our customers who are interested in government grants. We’re still developing our business intelligence capabilities but what we see so far is promising.

North America also continues to build higher margin capabilities that will benefit our business long term. The seismic services suite continues to add new partners and capabilities, forging an alliance earlier this quarter with Nimsoft, a leading provider of next generation performance and monitoring solutions.

We continue to develop our services expertise which will serve our well as Cloud based technologies become more common place. The North America team has always been at the forefront of new ideas and it’s their forward thinking attitude that will lead them to greater success in the coming months.

In EMEA, we made notable progress despite continued weaknesses in many of our regions’ economies. Revenue trends are improving with the year over year sales decline moderating and sequential sales growth a bit better than the historical seasonal norms. The strongest performances came from the U.K., Spain, Switzerland and Austria which all grew in local currencies compared to the prior year.

Sales remain soft in France, the Netherlands and Hungary, while Germany, Italy, and Belgium reported sales roughly in line with the regional average. In the Nordics, sales were down as a result of our restructuring which included the selling of our Danish distribution operation and closing of our Norway and Finland Classic distribution businesses.

In our other divisions, the Pan European group performed well with solid demand for components, peripherals and supplies. The data-capture point of sale division is still feeling the impact of the soft economy. We’re rolling up the small handful of acquisitions we’ve made in this space, aligning our costs and instituting consistent systems and controls.

Among our larger cornerstone countries, the U.K. was the top performer. The team has focused its attention on gaining more relevance with our vendors and has captured the number one share position with several top partners.

This month, Matt Sanderson was named the new Managing Director of the U.K. Matt has been with the company for 14 years and is returning to his native England after serving as a General Manager of our Volume and Consumer business in Australia. His early days in the new role will be particularly active with the acquisition of CCD which we announced earlier this week.

CCD is one of the U.K.’s leading distributors of servers, storage and software for the mid tier market. This strengthens our position in Europe’s value added space and is an exciting next step in our enterprise strategy.

In France, the economy remains particularly weak and business failures have risen significantly. However, the team made good inroads in the S&B market and is beginning to see growth in that segment. Germany is attracting more value business, signing up a blue chip server and storage vendor during the quarter while other commercial segments remain soft.

Our efforts in EMIA will continue to focus on better sales engagement through stronger relationships with vendors, further penetration of the S&B market and superior customer service. The infrastructure improvements of the last several quarters are driving profitability and helping the region deliver stronger results.

We’ll now move to Asia Pacific which had demonstrated remarkable resiliency in this economy. While the region experienced year over year sales declines since late last year, it has continued to deliver good operating income. In the third quarter Asia Pacific delivered the best revenue performance of the regions with mild growth in local currencies.

Third quarter operating income remained solid but declines from last quarter due primarily to a change of mix and products and geographical revenues. Our Asia Pacific portfolio includes several emerging markets that are more volatile than mature markets.

Many of the regions’ economies are bouncing back. Our China operation saw strong double digit year over year growth this quarter in part due to the government stimulus package and a stronger overall economy.

Australia also performed well with growth from its commercial business in both volume and value added segments. Singapore, New Zealand and Malaysia all ended the quarter with growth. DAD, the small New Zealand enterprise business we acquired earlier this year is performing well.

Our teams down under received numerous awards this quarter, a testament to their excellent management in a tough economy. In Australia, we were named distributor of the year by Australia Reseller Net, while New Zealand swept the local business excellence awards including recognition as the employer of choice.

In India, the IT market remains sluggish, dampening sales. Systems and software delivered year over year growth with sales of consumer products components being soft. The country is adding new vendors; products and customers which will help accelerate sales as the market turns around.

In other divisions, the regions data capture point of sales business performed well. As you recall we acquired Vantec, the leading distributor of DC Pause Pacific’s products in Asia Pacific earlier this year. The integration of that business was successful and the combined company is continuing the region’s profitability.

As we celebrate the fifth anniversary of our acquisition of Tech Pacific, we applaud the Asia Pacific team for its consistent contribution to the company’s results.

I’ll finish my review with Latin America, a region that has also performed well in this environment. In the third quarter all countries except for Brazil and Mexico delivered year over year growth. Chile, Argentina and the Miami Expert operation were the star performers of the quarter, delivering growth and improved profitability compared to last year.

The Miami division was especially strong with a record month during the quarter driven by stronger component sales and our ability to offer favorable credit terms to our customers.

In Mexico we saw a moderate sales decline in local currency as government spending remains constrained and the timing of some holiday shipments are occurring in the fourth quarter versus the third quarter last year.

The Brazilian operation continues to be impacted by the need to adjust to new local and national tax regulations as well as other operational issues which have clouded demand and affected profitability. We have plans in place to improve the situation and believe the country has strong long term potential.

The Latin America team has done an excellent job in managing through the recession, generating the highest operating margins amongst the regions for the last several quarters. Like Asia Pacific, the regions emerging markets create some volatility. While the challenges in Brazil dampen the operating margin a bit this quarter. The region’s overall performance was solid and we enter the fourth quarter in a strong position.

As we enter the final weeks of the year, we’re optimistic about the budding recovery and the potential firming of IT demand. For the fourth quarter we expect year over year sales declines to be reduced to single digit percentages, supported by improved demand and our emphasis on proactive customer management.

We also expect gross margin to increase sequentially as our fee for service business benefits from the holiday related retail sales. We will continue to invest in our business while managing margins, expenses and working capital at acceptable levels.

There are several opportunities that could help us deliver upside in the upcoming quarters. In addition to our own growth initiatives, new products and technologies will be coming to market. The world is abuzz about Microsoft Windows 7 which launched last week to rave reviews. We expect businesses to upgrade to Win7 over time as XP runs its course and there is greater adoption of other Microsoft products such as SharePoint and Office 2010.

Some believe it will also spur a hardware refresh as many businesses held off replacing machines during the recession. We have worked closely with Microsoft over the last several months to develop marketing campaigns and demand generation programs and we’re excited about the prospects.

We’re also working closely with our vendor partners in areas such as unified communications and data center development, both of which hold growth potential. We’re the leading partner of most of the vendors at the forefront of these innovations and we’re proud of our ability to increase demand and expand their reach.

We look to the new year with renewed energy, a winning attitude and a sense of excitement for the future. There is more work to do, but the mood has brightened. We’ve made the necessary changes. We’ve engaged in appropriate strategy and we’re ready to win.

While a stronger economy will certainly provide a welcome tail wind, we’re not waiting for recovery to deliver better performance. We’re making it happen now.

We are now ready to take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Craig Hettenbach – Goldman Sachs.

Craig Hettenbach – Goldman Sachs

On the cost front, now that the cost reductions are flowing through the model, how should we think about as demand does improve what OpEx or the pace of OpEx growth looks like in the recovery?

William Humes

Overall in the past we’ve given discussions and models that our cost structure would grow at half the rate of sales growth. That was in a normal environment, normal situation. I would actually say that’s probably the high end level of our overall cost assumptions, at least for a period of time while we ride the upswing of the budding economy and as it goes into recovery.

So it’s going to be less than that. It’s kind of hard to tell how much less than that, but it’s our job to manage those costs very tightly.

Craig Hettenbach – Goldman Sachs

The gross margin front, you mentioned it’s going to up sequentially. Should we think about it as typical for what you usually see in a Q4?

William Humes

We don’t give specific guidance, but you have seen over the last few years that quarter four is generally a stronger quarter for us. We anticipate that will be the case. We see normal patterns in place right now from a gross margin perspective playing their way through the results of the company so that’s a good assumption.

Craig Hettenbach – Goldman Sachs

With the cash on the balance sheet, any thoughts on the M&A environment and opportunity by region as well.

Gregory Spierkel

We’ve been fairly acquisitive over the last two years. If you think about it, seven acquisitions, four last year, all fairly small but very strategic and three again this year so far with the one we just announced earlier this week. Five of the seven have been geared towards point of sale and data capture and building out a capability on a global basis and we’re getting there at this stage very nicely.

And the two most recent ones, DAD and the CCD both in the enterprise computing data center space; one New Zealand, one U.K. We’re still interested to find and fill out the portfolio on the latter, so we’ll continue to work that as we see and find appropriate companies.

That’s part of where we think we have an opportunity to build out competencies for the next two to three years. We’re also trying to develop the business on an organic basis and so we’ve been dong a bit of both and we’ve messaged that I think pretty consistently over the last few quarters.


Your next question comes from Brian Alexander – Raymond James.

Brian Alexander – Raymond James

The revenue outlook of down single digits year over year suggests a range of $7.9 million to 8.6 million in the fourth quarter which is well above the consensus, but it is a wide range. Could you provide a little bit more color on what you’re expecting sequentially coming off this strong quarter by region relative to normal seasonality? And then related to that, it looks like FX is going to be a meaningful tail wind in the fourth quarter on a year over year basis and it seems like foreign currency alone could account for as much as a 10% swing in your top line growth which would imply that your year over year trends excluding FX may actually deteriorate in the fourth quarter, so I just wanted you to clarify that.

William Humes

That seems fairly high, at least in our modeling especially on a world wide composition of revenue. It’s obviously going to give, or looks like at this point in time it’s going to give a tail wind so it’s going to add to U.S. dollar growth but I don’t think it’s nearly, at least in our modeling that high.

Brian Alexander – Raymond James

Can you clarify what you’re assuming as far as a tail wind in the fourth quarter for FX?

William Humes

We don’t necessarily give that detail, but I would say it’s probably in the low to mid single.

Back to your earlier part, we’re not giving a hard number as you’re rightfully pointing out. We do feel confident that we are going to be in single digits down. Again, a little bit of the FX helping us but we’re operating better than we were. We’re more focused externally. The market’s looking healthier.

I can’t give you a hard number but we feel good about where we are right now in the quarter. We’re almost a month into it so the guidance that we’re giving here if you want to call it that is broad, but we’re at a comfortable spot with what you might have seen in prior year trends.

Brian Alexander – Raymond James

A follow up on expenses, excluding the charges in the quarter, your OpEx was down sequentially despite your revenue being up nicely excluding currency and then you also had some currency head winds on the expense line, so my recollection was that we were going to see about $7 million, maybe $8 million of quarterly savings this quarter. Could you help us bridge the second quarter and third quarter expenses? You obviously did a very good job controlling them, but just help us understand where specifically you had a lot of traction on expenses.

William Humes

Overall you’re right. We’re down quarter over quarter in expenses despite an essentially $800 million sequential increase in revenue. Part of that is the currency as we’ve depicted, but you do need to build the currency in there. So if you think about being down $5 million, there was an increase in our expenses because of currency roughly around $8 million.

Net net, you have to factor in the increase because of currency strengthening on a sequential basis. We did have a little bit less bad debt expense. We talked about our higher bad debt expense in Q2 mainly related to consumer business. That was a few million, so that didn’t reoccur in Q3.

And there was obviously some variable OpEx associated with the incremental revenue growth non currency related, so the local currency, and then the rest was basically the cost reduction actions as well as continued cost containment and savings and belt tightening.

Brian Alexander – Raymond James

How much were the savings specifically. My point was that I would have thought the revenue upside your expenses would have been a lot higher this quarter.

William Humes

It was at least 7.5 roughly calculated incremental 25% on our roughly $30 million quarterly full run rate.

Brian Alexander – Raymond James

Strategy question on this enterprise acquisition in Europe, could you just flush out the longer term strategy in enterprise hardware distribution? What products and customers specifically are you targeting? How much overlap are you going to have with big incumbents like Aero?

Gregory Spierkel

This is going to be a long answer, but I’ll keep it fairly brief because we’ll have a chance to talk a little bit more next week with the meetings that we have set up. Essentially we’ve been stating for the last few quarters that we’re trying to build out some degree of enterprise computing data center capabilities.

The vendors, our large principal vendors have been very supportive of us doing this. They see that there is an untapped opportunity market below the mid market which is an area where we’re strong.

So over the last little while, I’d say two years, we’ve been looking at this pretty extensively with a view that where we could position ourselves. And what we’ve done is that we’ve developed the capability that I’d say is pretty strong already in the Asia region. We’re very capable in Singapore. We’re very capable in India, Australia. We’re building up similar capability in China.

Our Brazilian operation is already very focused this way, and then we’ve been building on a green field context this capability here in North America. Added to that, the two recent acquisitions, so we’ve just added a bolt on capability of people in New Zealand earlier this year and now a start, and I would call it that, a start in Europe where through the CCD acquisition we feel that there’s more we can do there.

So this is part of a longer term voyage of building a capability that’s broader, in part because the vendors are pulling us in this direction and part because we feel it’s a healthy margin contribution arena for us. And what we have been working on thus far has been slightly more positive than what I’d call our commodity or high run rate business.

So we’re pleased with how it’s moving and progressing at this stage.


Your next question comes from Matthew Sheerin – Thomas Weisel Partners.

Matthew Sheerin – Thomas Weisel Partners

My question is around the strength that you saw in North America, obviously very strong and certainly stronger than the overall distribution market was in the quarter. Where do you think you took the market share either by customer, or by vendor?

Alain Monie

We’re still compiling data on the share. That’s not readily available and we need to look at it. What we believe clearly is that we have at least taken the growth as the markets improved. The sequential growth though, matched or exceeded our vendors’ growth here in North America.

So it’s still not very clear how much of that has been the market upside and how much has been us taking share, and we’re working on trying to clarify that as we get the market share data. But we feel strongly that we have at least captured the market growth there.

Matthew Sheerin – Thomas Weisel Partners

Given the decline in the gross margin and I now that the important thing to you is the operating margin, it was certainly up significantly and very nicely. But the question is, did you use pricing to take share either in North America or Europe and on the gross margin you said that the floor you’re looking for is around 5.4%. Taking away the seasonal uptick that you see in December, are you expecting it to be at the low end of that range over the next couple or three quarters until we get a better demand environment or are you trying to look to protect the margins and maybe not take share, but now that you’ve got the base business at a higher level.

Gregory Spierkel

Essentially we felt that we’ve managed to capture our revenue in the quarter off the base of what has probably been a fairly normal margin for us over the last few years. We’ve typically been if you look back past the last quarter or two, we’ve typically been in the 5.5% range and we weren’t too far from that in the quarter we just finished so close again, comparable to last year.

Q3 is usually a little softer margin quarter for us because the volumes tend to be a little lighter on a normal year off the back of what we see in Europe in particular. So as we worked our way through this quarter that we’ve just finished, most of the opportunity that came to us was as a result of just us being more focused externally than we have been in the prior two or three quarters.

We’re making a lot of changes and we were focused on organizational reductions and new structures, new programs, new systems so it just meant an outward focus for the organization. So I don’t think it was a case of us trying to work anything in the pricing domain.

As we look forward, I think I tried to give a bit of comment on that before, we feel that we’re going to try to stay within the ranges you’ve seen in prior years for us. We think we’re back on a plane if you may, and we want to try to stay on that plane with our customers, with that external focus and that’s the biggest piece of the emphasis here.

It’s not so much a share discussion, it’s more of a discussion of the breadth of the relationships, the initiatives, the programs that we’re taking out and a greater focus with what the vendors are trying to achieve and our alignment with them.

Matthew Sheerin – Thomas Weisel Partners

You talked about the bad debt expense being higher in the June quarter and helping you in the September quarter. What was that specific number?

William Humes

It didn’t necessarily help us. Overall I would say it helped us on a sequential basis. I would say it’s roughly a few million dollars, $2 million to $3 million, almost entirely North America in that regard which we talked about in Q2.

Matthew Sheerin – Thomas Weisel Partners

Regarding your guidance, it sounds like you feel there’s a little bit of better visibility in the business. You’re seeing a little bit more seasonality, yet you’re not giving and specific guidance except to say what the trends would be on a year over year basis. Are you still not really comfortable with the visibility?

William Humes

Clearly we’re still living in a somewhat volatile world. As much as things are improving from a low position of two, three quarters ago, it’s still a little choppy out there, and as a management team, we’re frankly more comfortable not getting into too much strict guidance at this stage. So it’s a decision that we’re making here that we’re more comfortable at this level for the time being.


Your next question comes from William Fearnley – FTN Equity Capital.

William Fearnley – FTN Equity Capital

The gross margin line, any additional color on competition by region, and gives and takes in mix and quite frankly I was surprised that the gross margin performance considering the upside to revenue, were there any MDF programs at the OEM level that affected your gross margin performance for the quarter and that might color the gross margin performance here in the next few quarters?

William Humes

Overall we talked about the competitive environment continues to be competitive across most of the countries as it always has been. We continue to have to win our business day in and day out, but we’re driving the teams and our teams are driving to get deeper and broader relationships with our customers and vendors.

Overall I would say the margin as usual, remained competitive but stable. In the sense of MDF or other marketing programs, yes. As you grow revenue and drive growth against revenue, their targets and revenue goals, you’re hoping to also drive back in monies and back end marketing funds which did occur to some degree, so there’s always that going on.

In some quarters you do fairly well and some quarters you do less. But there’s so many different dynamics of gross margin between finance pricing, marketing funds, mix of product that it’s hard to isolate one item or another.

Gregory Spierkel

Let me add just another few thoughts here too. I think we emphasized this but mix of product in the quarter that we just came out of was heavily biased towards PC’s and servers, so we had good performance there, really strong unit performance, growth year on year performance, very healthy growth.

That will pull the margins a bit down as they have in the overall mix. And we had also the mix of some countries that were very solid in the month that are slightly lower margin operations. U.K. as we mentioned strong growth for us but slightly lower margins in a Europe context.

Very strong performance in China but a slightly lower margin again within the context on a global level out of Asia. Those types of things are figuring into the mix overall here.

William Fearnley – FTN Equity Capital

On the demand side, any comments on linearity during the quarter? When you talk about your view getting better and the overall view of the business getting better, was that constant through the quarter or did you see significant improvement towards the latter half of the quarter and is that coloring your view here as you enter the calendar fourth?

Gregory Spierkel

I’d have to say typical of what we’ve seen so far this year is that the first two months of the quarter tend to be relatively softer or worse if you may on the full quarter basis versus the full quarter average, and the month in the case of March, June and now September, vendors, customers, pulling out all the stops to bring business through the door.

The good news about this quarter that we just finished was that the overall drop from year on year was less in each month and definitely a very healthy September, and that healthy September has come in to show the trends again are appreciating slightly as we go into October and thus our limited guidance at this stage on where we’re going.

So it looks encouraging. We’re seeing enough data points from the vendors, Data Quest, IDC, we’re looking at all the same points you are and things are showing directionally that the down draft is lessening with every passing month.


Your next question comes from Ananda Baruah – Brean Murray.

Ananda Baruah – Brean Murray

Shifting back to revenue if we could, in North America did you see any unusually large deals come through that helped revenue? Could you talk about what you saw in the government vertical as well?

Alain Monie

As we discussed already on the revenue it has been pretty much across the market. You obviously have as Greg mentioned, in September a little bit of a pick up, so maybe yes, some deals there that happened better than last year was. But I think it’s really across the market.

As far as the government business, it is one of the most solid segments we have today, yes particularly in the education side. We’ve seen fairly good traction on that segment.

Ananda Baruah – Brean Murray

But nothing unusual that you would consider one time in nature.

Alain Monie

Absolutely not.

William Humes

If you want to call it, a solid run rate business quarter to quarter, it’s still down on last year.

Ananda Baruah – Brean Murray

Could you talk specifically about some of the things you did with the sales team to get those guys focused and re-energized, I think those were the words that were used, during the quarter. You actually had a pretty impressive, pretty quick about face on the sales side.

Gregory Spierkel

There are a few things. There have definitely been new incentive plans that we put in place with the sales force. There’s been a significant amount of discussion with the vendors on how do we get back on a plane with some of the revenue goals and targets that we were trying to set for each other and like I said before, if you take a certain amount of effort that was spent internally to restructure and right the ship while the revenues were coming down, and kind of re-orient the organization externally that makes a big difference.

But we’ve been also using tools. As examples, maybe Alain will give a couple of others, but we’ve been using our database and analytics tools with certain customers and vendors as we mentioned on the call here.

Those sorts of things are all starting to get us some traction, and we really did see the traction take place in the month of September. The prior two months was probably the market pulling us along to some extent.

Alain Monie

We’ve been fairly internally focused for a certain time as we were adjusting our cost structure so there was a deliberate effort to really take our sales team up now and really looking outside of the market and having that completely revitalized.

We also injected some decision making process changes that speed up the quality and the speed of decisions. We’ve adjusted some metrics internally to give the sales teams a little more decision making power down the trenches.

So it’s a result of actions and tools and elements that allow them to really take the decisions within their own guidelines, but still in a more nimble and effective way.

Ananda Baruah – Brean Murray

Is there anything on the cost side embedded in some of the stuff that you’ve begun to implement that could carry through incrementally in the cost structure going into next year?

Gregory Spierkel

We have stated that we’ve gotten through most of the changes from a cost point of view in year. Most of those changes have finished actually in Q3 and now I don’t thing there will be much of anything in Q4 so we are now moving forward as a company into next year fairly clean.

William Humes

If you’re talking about some of the programs or training or tools that we’ve implemented to drive this, that would all be captured or netted into our overall cost scenarios and the bottom line is the additional profit generated from the sales, you would pay for any of that. So I wouldn’t say it’s any material amount.

Ananda Baruah – Brean Murray

Next week is it safe to say you’ll provide a 2010 outlook?

Gregory Spierkel

It’s not safe to assume that. We’ll see where we are next week.

Let me close the call if I may. Before I end the call I’d like to leave you with a few following key take aways. With our internal focus on improving internal operations largely completed, we’re engaged with our vendors and customers in a more proactive manner to drive greater profitable growth for the company.

We have a strong balance sheet with limited debt and exceptional working capital management that gives us considerable flexibility in working with our customers and acting quickly on strategic opportunities as they arise.

Finally, the mood has changed. The demand for IT is improving and our team is energized. Our sense of optimism is heightened and we look forward to being in the growth and profitability leader in this industry.

Thank you for attending the call.

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