Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Insight Enterprises Inc. (NASDAQ:NSIT)

Q3 2009 Earnings Call

November 04, 2009; 05:00 pm ET

Executives

Rich Fennessy - President & Chief Executive Officer

Glynis Bryan - Chief Financial Officer

Analysts

Brian Alexander - Raymond James

Matthew Sheerin - Thomas Weisel Partners

John Lawrence - Morgan Keegan & Co.

Brian Alexander - Raymond James

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2009 Insight Enterprises Incorporated Earnings conference call. My name is Letrice, I’ll be your coordinator for today’s conference. (Operator Instructions)

At this time, I would like to turn the call over to your host for today’s conference. Glynis Bryan, please proceed.

Glynis Bryan

Thank you. 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 October 30, 2009. I am Glynis Bryan, Chief Financial Officer of Insight Enterprises, and joining me is Tony Ibargüen, Interim President and Chief Executive Officer.

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

Today’s call, including all questions and answers, is being webcast live and can be accessed via the Investor Relations page or website at www.insight.com. An archived copy of the conference call will be available approximately two hours after completion of the call, and will remain on our website for a limited time.

This conference call and the associated webcast contain time-sensitive information that is accurate only as of today November 4, 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 third quarter 2009 earnings and diluted EPS results. You will find a reconciliation of these non-GAAP measures to our GAAP results posted on our website 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 them in forecasting our future performance because we typically exclude items we believe to be outside of normal operating results.

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 our actual results to differ materially. These risks are discussed in today’s press release 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 Tony to walk you through our third quarter 2009 operating results and to share his initiative perspectives on the business after his first 50 days or so in the interim COO. Tony.

Tony Ibargüen

Thank you, Glynis. Hello everyone. Thank you for joining us today to discuss us third quarter operations results. As we reported earlier today, consolidated net sales for the third quarter were $970 million reflecting a decrease in 17% from last year’s third quarter net sales of $1.2 billion.

Gross profit was a $133 million down 13% from a $154 million. While gross margin was 13.8% up from 13.2% in the third quarter of 2008. And during this quarter we recorded the following one time items. Net severance and restructuring expenses of $4.0 million, $2.5 million net of taxes, related primarily to the departure of the company’s CEO and professional fees associated with the restatement, remediation and ongoing litigation of approximately $560,000, $346,000 net of taxes. Excluding these one time items, earnings from operations increased 10% to $16.4 million from $15 million last year.

Net earnings from continuing operations increased to $10.1 million from $6.6 million and diluted earnings per share from continuing operations were $0.22, up from $0.14 in the prior year quarter. These results reflect stronger than expected performance in our North America and Asia Pacific operating segments that more than offset softer than expected results in our EMEA business.

With just over 50 days in the interim CEO role, I want to take a few minutes to give you my initial perspectives on our business and the demand environment, then I’ll hand it back over to Glynis, to take you through the operating segment results for the quarter.

Over the short period that I have been in this role I have met and talked with many key clients, partners and industry contacts. The message from them has been consistent in that they believe an insight value proposition and have high expectations for our relationships in the future. In addition I have spent extensive time with our management and teammates here in North America and abroad. We have a talented team with great passion for Insight strategy and potential and they are making progress on operational improvements.

For example in early October we launched a new home page on insight.com that includes enhanced navigation and purchasing functionality improving the ease and efficiency of our clients buying experience. In addition the new home page provides enhanced merchandizing opportunities for our partners with an expanded number of product features and client segments specific web pages for small, medium and large businesses as well public sector institutions.

Today on average only 40% of Insight’s product transactions in the US are conducted through the web. We believe that is a significant opportunity to increase this percentage with the improved website and we will continue to invest in functionality on the site as we move forward.

Our leaders and teammates also identified other areas where we need to improve our execution. For instance they have repeatably talked about how the acquisitions, financial restatements and economic challenges of the past few years resulted in managements attention being focused internally instead of on our clients and partners.

With those distractions behind us we are focusing on aligning our go to market strategy with our clients and partners need from us. We intend to drive alignment and consistency throughout the organization culturally and operationally from goals and incentives to accountability and metrics.

With respect to the demand environment we continue to believe that hardware demand in North America is stabilizing. As evidenced by the sequential quarter growth in our sales in this category in the second and third quarters of this year; however reduced average selling prices and competition have resulted in lower gross margins year-over-year. We expect a gradual recovery in hardware sales in North America over the next few quarters, an industry analysts are predicting a possible spike in growth from a corporate refresh cycle of IT products in late 2010 into 2011.

In the software category North America the market continues to be soft but our performance in this category so far this year has been generally consistent with our expectations, and we anticipate returning to organic growth as the economy recovers.

Given the current market environment and the effects of publisher program changes however I wanted to point out that we do not expect to see the pronounced seasonal increase in software sales in the fourth quarter of this year that we have experienced in prior years.

As we close out 2009 we will continue to work diligently with our partners to ensure that we are aligned with their views of the opportunities and focus area for 2010 and beyond. In EMEA, despite failing to achieve our internal profitability targets for the third quarter our team was able to drive sequential quarter growth in hardware and services sales as a result of market share gains in the public sector and middle market client segments, which we have actively focused on penetrating this year.

We are not yet able to call a bottom to the economic and IT spending declines in EMEA. Despite the fact that we’ve performed reasonably well on the sales line in this environment, we’ve not had the flexibility to reduce our costs as aggressively as we have in North America. Given the expense associated with resource action in this region, combined with our strategy to pursue market share in key countries in 2010, we will look to improve our profitability in EMEA, by continuing to outpace our competition in sales while controlling our costs and incremental investments as the market recovers.

Let me hand it back over to Glynis who will discuss the third quarter operating results of our business segments. Glynis.

Glynis Bryan

Thank Tony. In North America, net sales were $686 million down 19% from the third quarter of 2008. Gross profit decreased 12% year over year to $93.3 million. All gross margin increased to 110 basis points to 13.6% from 12.5% in the prior year.

These results affect another quarter of strong contribution from our high margin adjusted business, which saw a sales increase of 13% year over year and contributed an additional 90 basis points to a margin performance during the quarter. The increase in services contribution is primarily due to a large professional services engagement during the quarter.

Gross profit and margin also benefited approximately $1.9 million from the elimination of certain restatement related trade credits during the quarter through negotiated settlement or other legal release.

Please note that as we move forward, trade credit is resolved in the ordinary course of business will be removed from the balance sheet in the period that the credit is either paid or the company is otherwise released from its legal obligation.

Net sales in our hardware and software categories were down 24% and 15% respectively. However, we continued to be encouraged that for the second consecutive quarter, we saw sequential quarter growth of approximately 3% in sales of hardware are holding gross margins steady in this category. Selling and administrative expenses from North America in the third quarter include approximately $600,000 of professional fees and costs associated with the restatement remediation and ongoing litigation.

Excluding the effect of this item, selling and administrative expenses were down $19 million compared to last year or 19% primarily due to the cost reduction initiatives we have implemented over the past several quarters and to a lesser extent, the effective lower variable costs on lower sales. We have recorded severance and restructuring expenses of $4.5 million in North America, primarily for the departure of the company’s CEO in early September.

As a result, earnings from operations on a GAAP basis in North America, were $9.5 million in the third quarter and excluding these one items earnings from operations increased 66% year over year to $14.5 million demonstrating the operating leverage we have achieve on our lower cost structure. Moving on to EMEA, our EMEA operating segment reported net sales of $248 million down 12% in US dollars.

In constant currency terms, net sales were down 2% versus last year. In local currency, our UK business reported an increase of 16% and 5% in software and services sales respectively and a decline in sales in the hardware category of 5%. Across the west of EMEA, net sales decreased in local currency, driven largely by a lower volume and vendor program changes in the software category.

Gross profit in EMEA was down 18% in US dollars and down 9% in constant currency terms, while gross margin decreased to 14.3% from 15.3% in the prior year. The declining gross margin is primarily related to decreases in credit margin year over year, due to a decrease in average selling prices, reduced contribution from the services category and a reduction in fees associated with enterprise software agreements.

Selling an administrative expenses in EMEA in the third quarter were down $3.1 million year over year in US dollars and in constant currency terms were flat year to year. This segment also recorded approximately $300,000 in severance expense and reversed approximately $800,000 in other restructuring expenses in the third quarter primarily related to the determination at certain previously recorded facility lease reserves were no longer necessary.

Excluding the benefit of severance expenses on the reversal of a restructuring reserve, EMEA reported earnings from operations of $1 million, a decrease of 82% year over year. In our Asia Pacific operating segment, net sales of $36 million were up 8% from the prior year in US dollars and up 12% in constant currency terms, primary resulting from an increase in the Australian public sector spending in the quarter.

Gross profit was 4.8 million and gross margin was 13.4% down from $5 million and 15.2% in the prior year quarter. Declining gross margins primarily due to the increased mix of public sector business, which is typically transacted at lower margins as well as program changes in the software category. These results combined with tight expense management resulted in the Asia Pacific segment reporting earnings from operations of about $900,000 which was up 34% from the prior year quarter.

Moving onto the tax rate, our effective tax rate for the third quarter was 21.6% compared to 24.4% in the third quarter of last year. The decrease in the current period tax rate from our usual range of approximately 36% to 39% is primarily due to $1.5 million in benefit, from the true up of certain foreign tax credit after filing our 2008 federal tax return and the recognition of certain tax benefits from the settlement of audits.

Comparatively, in the third quarter of 2008, our tax rate benefit is from a $1.1 million of federal and state research and development credit as well as a higher percentage of taxable income being generated in countries with lower tax rates than in the US.

From a cash flow perspective, for the first nine months, ended September 30, our operations generated a $107 million compared to $62 million for the same period in 2008. We ended the quarter with $69 million of cash and a debt balance of $158 million. This cash flow performance was better, and our ending debt balance was lower than we expected, due primarily to the timing of certain key supply things. I’ll now turn the call back to Tony for his closing comments.

Tony Ibargüen

Thank you Glynis. Looking at the fourth quarter outlook, because of stronger than expected third quarter performance, but moderated by our anticipation of continued softness in EMEA compared to our original fourth quarter forecast, we are revising our outlook for diluted earnings per share from continuing operations to be between $0.83 and $0.88 for the full year of 2009, including $0.18 to $0.23 of diluted earnings per share expected in the fourth quarter of 2009. 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.

Now, for some closing comments. In summary, in my first 50 days in the interim CEO role, I’ve encountered few surprises and as I mentioned on our first call, the board of directors and I continue to believe that Insight has a sound business strategy and is well positioned for success in the future. As we head toward the end of 2009, and into 2010, we will continue to focus on our strategic priorities and on improving our operational execution.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brian Alexander - Raymond James.

Brian Alexander - Raymond James

Thanks and good afternoon everybody. Could you guys just provide a little bit more detail on the Q4 earnings guidance, specifically, how do we get just flat earnings sequentially. I understand that your tax rate may be going back up and that provides a little bit of a headwind, you talked about, Tony, I think that you are not going to see as much seasonality in the software business, as you would typically see.

So may be expand on that point, how much below seasonality do you think the software business will be and what is driving that particularly as we have some new software from your major publisher in that business and then I guess just layering onto the earnings progression from Q3 to Q4, how much of that is additional gross margin we missed in your key segments, thanks.

Glynis Bryan

So Brian, I guess addressing your point, you are right, we have a couple of headwinds coming from the tax rate impact, I can’t give you a precise percentage with regard to the reduction that we will see on a quarter of a quarter basis, as it relates year over year basis, as it relates to software, but the reduction that we are talking about there is related to the program changes that we discussed and have discussed in each quarter, that when it will affect the beginning of May of this year.

So the impact in Q2 and Q4 are typically, will be typically larger than the impact of Q3 only because Q2 and Q4 and typically larger software quarters, but our Q4 quarter historically has not been trending a stronger outlook as of second quarter.

The other piece I guess, in terms of the reference I think to Windows 7 that you made, that’s not something that’s going to impact corporates in the near term with the lease that just came out. I don’t think that we are envisioning that there’s going to be an impact on the corporate segment specifically large enterprise segments, the second half of 2010 maybe going into 2011, and that historically is related to the fact that large corporates usually are late adopters after the first iteration of the changes have gone through, the publisher one.

Then also access to Windows 7 is actually embedded in the large enterprise agreements, so they can upgrade to Windows 7 in the large enterprise agreements without actually having to buy it, so there’s not going to be an incremental revenue flow in the large segment of our business coming from that.

Brian Alexander - Raymond James

Just a follow-up on software, why does the change in the program affect your seasonality in Q4? I thought that was primarily a change in compensation, i.e. your margin rate was compressed as a result of those changes. Are you suggesting that you are just not looking to grow that business as aggressively as you have in prior years because of the difference in profitability and that’s what’s causing the seasonality or it might be...

Glynis Bryan

No, not at all, not at all, not at all. I guess if you think about it, we have a fee that we earn on large enterprise agreements as an example, and what happens is, that we have several of those large enterprise agreements that would normally have been richer fee for us in the fourth quarter of last year.

In the fourth quarter of this year it’s going to be a significantly lower fee than it was towards last year and the enterprise agreements actually flow through, because you know revenue is margin in that regard for us and it’s the reduction in the fee associated with enterprise agreements, as well as reduction in some of the overall kind of discount structure related to hitting certain volume thresholds that is driving the difference in the fourth quarter, but it’s not related to the business any less.

Brian Alexander - Raymond James

Right, now I understand why it would be down on year over year basis because the program changes more earlier in the year, but why would that affects the sequential change from Q3 to Q4 if you are already operating under those rules in the third quarter?

Glynis Bryan

That’s a fair question and I think the other part of it is that normally in the fourth quarter, we get a lot more true-ups where we actually go back and look at what has been used by the client and we get some incremental revenue associated with the fact that the number of seats that they’ve used this year and in the second quarter, this happens to us in the second quarter as well too.

We didn’t see as big a sequential bump in the second quarter as we would historically have seen and it’s related less to the just EAs and the fees on the EAs but more so to the true-ups that we are not getting just because volumes of their large clients are down, you don’t get a true down, but you don’t actually get the true-up either.

Tony Ibargüen

Brian, you also asked about the underlying gross margin was deteriorating and I think the answer to that is no. We think it leads to North America that we have flattened out on gross margins, I did comment that on a services standpoint Glynis mentioned we did several large projects and so we may not get the same bump that we got in Q3 and although we have a good pipeline of new services projects we don’t expect to have quite the same performance.

In EMEA we are not completely sure that we bottomed out, we are hoping that we are getting close to a bottom. We have seen some margin degradation there. So again I think you are picking up that while we are sensing a stabilization of raw, we are not quite, we don’t believe we are going to get the same profit we what normally get in Q4.

Brian Alexander - Raymond James

So is the biggest delta relative to what you had expected before and what we had modeled for Q4 sequential growth in earnings , is the biggest delta the software business or is the bigger delta the change in your European outlook?

Tony Ibargüen

Well, one part is we did better in Q3 than you had modeled or you had planned, all right, so that’s one piece, and I think those are the elements precisely as you articulate it. We are not looking for the same sequential movement in software and there is still some uncertainty in EMEA as well as in the overall North American marketplace.

Brian Alexander - Raymond James

Okay. And then just one follow-up and I will get back into queue just on the CEO search, maybe I missed it during your comments Tony, but what is the updated timing on that, can you talk about how close the company might be to naming a permanency, just adding more color on that would be helpful? Thanks.

Tony Ibargüen

Sure Brian. I know we didn’t comment on it. The board initiated a search as we had announced on the day of the announcement of my interim role and of our change, the initiative and they have been working diligently on that, the board committee has bee formed, I know they have met with candidates and they are working to hopefully conclude that by the end of the year.

Operator

Your next question comes from Matthew Sheerin - Thomas Weisel.

Matthew Sheerin - Thomas Weisel Partners

So looking into the fourth quarter in North America, it looks like you had some, at least some return to seasonality in the hardware business and do you expect the same seasonality, it sounded like you just said Tony to think to little bit cautious because you don’t really know how spending is going to play out. But what are expectations generally for North America in hardware?

Tony Ibargüen

Well, we are encouraged by two quarters in a row of sequential growth in the hardware category, and we are encouraged by the fact that our gross margins and hardware seem to have flattened out. They are still down year-over-year from Q3 of ’08, but the fact that we have stabilized and that we are growing sequentially is encouraging as we look at industry results Cisco announced today, and some of our competitors have announced recently, we are generally feeling like the whole market is at least back to a reasonably normal pace.

Where that goes, we are still in a somewhat uncertain economic environment. As we talk to our customers, they are planning on establishing budgets in the fourth quarter. We are hopeful certainly as we look forward, but there will be spending increased plan for 2010 at some point, but going to this fourth quarter, we are still very much in that mode of working for every nickel and diamond, pressing hard to show growth.

Matthew Sheerin - Thomas Weisel Partners

Okay, and I know that you have acknowledged losing some market share in the SMB segment as you have gone through some IT transitions and other things, do you think that you are beginning to hold your own in terms of market share or even see opportunities to take share back?

Tony Ibargüen

That’s an interesting question because we are actually seeing some improvement in the larger company environment but we still have such a broad based customers in the mid market that’s just providing most of the growth sequentially in hardware. So we are encouraged by that and we hope to continue to see that trend improve.

Matthew Sheerin - Thomas Weisel Partners

Okay, and just some modeling questions. I know you gave some guidance, but given that you don’t expect to see as strong or a seasonal quarter in software, should we expect not to see a normal big increase in gross margin that you have seen in past fourth quarters?

Glynis Brian

Yes Matt, I think that would be the same modeling assumption.

Matthew Sheerin - Thomas Weisel Partners

Okay. So flattish to give or take, and then on SG&A did…

Glynis Brian

I am sorry, just to declare. I think when we indicated that there was potentially going to be sequential growth in hardware, we have had two quarters of that and while we said that the sequentially software was going to be not as large as it has been, we still expect it to be up slightly sequentially.

Matthew Sheerin - Thomas Weisel Partners

That’s on revenue, I am just trying to get how the gross margin shakes down off of that mix.

Glynis Brian

I am talking about gross margin as well too because the issuance on software is primarily related to EAs but we will still see a little bit of uptake on margin there. Then the second things is that will be offsetting that to some extend could be our services business with regards to the large contract we talked about that we had in Q3 and whether that will repeat in Q4.

Matthew Sheerin - Thomas Weisel Partners

Okay. So you think it should be up then? Is that what you are saying, I am sorry?

Glynis Brian

I think I confused you, there in your question. I think I am just going to leave you to do your own model.

Matthew Sheerin - Thomas Weisel Partners

Okay fine, and so with that contract, is that a quarter-by-quarter contract that gets renewed every quarter?

Tony Ibargüen

It’s a substantial contract that we started earlier this year, unfortunately it’s a company that will let us mention their name but it’s really a very exciting project that we did and we did very well. There is a little bit left in the fourth quarter, it has been ongoing but the biggest profits in the third quarter. And as I mentioned earlier we do have an expectation of growing year-over-year and services still, but sequentially it won’t be the same margin boost that we received in the third quarter.

Matthew Sheerin - Thomas Weisel Partners

Got it, and then just lastly on expenses, you did bring it down nicely quarter-to-quarter, is there much left in terms of your CapEx cuts or are you sort of at the bottom here?

Tony Ibargüen

Again I will have say, stepping into this I have to repeat what we have said before that I have great admiration for the teams courage late last year in 2008, early 2009 for taking the actions early and promptly, you look at our earnings in the third quarter being up year-over-year when everybody else is down, that’s largely the result of some very aggressive and courageous moves that this team made at that point in time.

So I think we have taken about as much as we can or as much as need to at this point, now we need to focus really on aligning our go to market strategy to be able to recapture the growth momentum that we have had in the past.

When we look at EMEA and that’s a North American state, when we look at EMEA as I mentioned earlier in the statement it’s more difficult to take cost our as aggressively there and we think we have seen the benefit of that at least at the top line where we have maintained a position in the market place that relative to competitors is very favorable from a top line standpoint even though our earnings have not been what we had hoped.

But as we look at the market at this point in time it doesn’t make sense to us to incur that significant incremental cost in many of the countries in Europe to share the expenses in light of the fact that we see the potential for some growth in each of those markets in 2010.

Operator

Your next question comes from John Lawrence - Morgan Keegan.

John Lawrence - Morgan Keegan & Co.

Tony, would you comment just a little bit. When you had the press release when you came into the job you talked about just doing some things with more speed and seeing some opportunities. Having had a couple of months in the row, what would you see from an execution standpoint, a couple of things that might be more difficult than you expected, just some maybe some before and after sort of thoughts on perceptions when you took the job?

Tony Ibargüen

Great, sure, would be happy to. Actually let me start with out EMEA and APAC teams, Glynis and I have had a chance to spend some time over there, with our management team and I have to say I am very impressed with the breadth of our team and the capability that exists over there, despite a very challenging earnings environment for them and to some extent dropping it, they’ve been able to maintain reasonable momentum particularly in the UK.

A good deal of that is because they have a reasonably mature and consistent management system and process and team in place, they do make a quick and good decision and so the speed with which they move is really something that we think is a very strong point for the company.

In North America, because of the disruption of having to shed a lot of cost, and some of the issues that we are lingering from prior, you know systems integration, multiple acquisitions, there - there are still opportunities for us to improve and the first and foremost is in how we go to market and how we are positioned from the sales standpoint.

We have great opportunities there to become more efficient to be able to have more decision making capability in the field and we have a very talented group of people, but we go to markets in multiple ways and in my view, that’s the best opportunity we are going to have in the short term for improving ourselves as going to be in that area.

We are looking very closely at that, than a very capable leadership team here has been working on that for some time prior to my arrival and one of the things that I’ve been quite pleased with is, that the team has been very forthcoming, with acknowledging that their areas of opportunity and a real willingness to improve ourselves in the short term.

John Lawrence - Morgan Keegan & Co.

So just to summarize that, if that’s okay, just that strategically no changes from what you thought economic challenges might delay that and EMEA and APAC and then just to further clarification that you need better alignment in North America.

Tony Ibargüen

I think that’s probably right. We, also said if you remember some of Tim’s comments, as we look at it from a board standpoint, the company continues, we continue to believe the company is well positioned strategically. We have very significant differentiators from our competition as we go to market and the opportunity for us particularly in North America is to execute the business plan that we have in front of us more efficiently and effectively than we have in the past.

Operator

Your next question comes from Brian Alexander - Raymond James.

Brian Alexander - Raymond James

Yes, just a couple of follow-ups. So Tony, as you look at the business, longer term, now that you guys are providing guidance or even milestones, but I thought I might try to pin you down at least on your thought process around long-term profitability. What would you characterize as the minimum acceptable level of operating margin for this companies longer-term and specifically, what regions and/or segments or categories do you think offer the most potential in getting you to that goal?

Tony Ibargüen

Brian it’s a great question, I’ll tell you, seven weeks in or so, it’s too early for me to know, precisely what we can realistically shoot for, I certainly understand the business model and the value model that says that margin expansion for us is probably our greatest opportunity to improve return on invested capital and show our shareholders that we know we are doing, so that is very much the focus of a lot of our discussions and activity.

We are like many companies going through budgeting cycles and planning cycles for 2010 and beyond and that’s top of mind, I can tell you that, but I don’t have a precise number for you, though it would be our expectation and goal to continue to improve on that operating margin line, going into 2010.

Brian Alexander - Raymond James

And just the discussion around restructuring actions, you were pretty clear on both of your major regions, that at this point you didn’t feel like additional actions were necessary or in the card, then I just wanted to clarify, is that decision a function of your role as interim CEO and therefore may be reluctance to make any lasting changes as interim CEO or is that a decision that you would stick to even if you were a permanent CEO?

Tony Ibargüen

That’s a fair question. And frankly I don’t know that if you’ve interviewed the team privately here, they would tell you that I’ve been acting like an interim CEO, I am trying to do my best to understanding and being transparent about the fact that we could have another change, I’ve been trying to act like the guy who’s going to be here and they’ve been very kind to treat me as such.

So the fact is, as I look into the business, we need to be able to plan on taking advantage of all the and capabilities we have and to the extent, for instance in North America that we were to cut deeper into some of the different capabilities that we bring to the table today, that would limit our ability ultimately to strengthen our value proposition by having all those different services and capabilities that differentiate us from the typical direct marketing resell.

We just had our partner forum here in Arizona with 400 of our top partners in town and I will tell you that the absolutely consistent feedback is we are well loved by that partner group who want to see us successful in growing in the future and they will all say, you know you guys have things that nobody else has, you have capabilities, we just need to operate more efficiently, more effectively as we go to market.

The decision on EMEA separately is a call that says the market will stabilize perhaps not quite as quickly as the North American market, but it will stabilize - we are going to grow strategically by adding capabilities in countries with the new systems implementation that we are most of the way through and in 2010, we want to be able to further differentiate our capability of offering software and licensing services by having hardware and other capabilities in several countries and in order to do that, we have to invest in people and systems and process to position ourselves well.

So, I think in summary my feelings about that, my comments are based on the optimism that we do have the right model and the right strategy that the markets will return perhaps never to great robust growth, but certainly to more moderate and reasonable growth, and that we want to be well positioned to capitalize on that with our differentiated offerings in each of our markets.

Glynis Bryan

And I guess Brian, if I could just add on one thing, we had announced earlier, may be at the end of the fourth quarter call potentially, that we were anticipating that we are going to see a benefit of about $65 million in reduction in our SG&A in North America and I think that today we are definitely tracking towards that.

If you back out the impact of Kaylans for the first quarter when we didn’t own them last year, we are actually tracking closer to about $77 million to $78 million in reduction and SG&A on a year over year basis, which is primarily coming out of North America.

So, I think that the, to back up Tony’s points, the reductions that we’ve taken in North America, I think have been significant and have helped us clearly in this quarter with regard to being able to report up results at the EFO line on a decline in revenue, but I am not sure there’s a whole lot more there for us to cut and still be a viable partner to our partners and also to our clients going forward.

Brian Alexander - Raymond James

Right and just to follow on that point, do you actually think that there is going to be a step up in investment that will be required to generate the growth that you think is needed, that might ultimately depress operating margins in the short run and then accelerate them in the long run.

Tony Ibargüen

Well, the good news is in North America at least we have opportunities to invest in areas, one example in an area that I mentioned that I was interested in back in September cloud computing and software as a service, there is an opportunity for us to invest in that capability beyond what we have so far.

But to have it payoff in a, within the same period, so it wouldn’t be a degradation in anyway and it would position us well for the future. As I look at our go to market team in North America I think we have plenty of resources and capability in place today, it’s just how we are deployed currently. So there again I don’t think it would be necessarily a degradation in our margins as we make those changes. The comment on where we are investing is in fact in EMEA.

So while we actually have taken headcount out in EMEA we have already this year reinvested in systems that we need to have in place next year in order to be able to expand our capability. So most of that we are effectively absorbing 2009.

Operator

There are no further questions in queue at this time. Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and everyone have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Insight Enterprises Inc. Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts