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Insight Enterprises, Inc., (NASDAQ:NSIT)

Q2 2010 Earnings Call

August 4, 2010 5:00 p.m. ET

Executives

Kenneth Lamneck – Chief Executive Officer, President, Director and Member of Executive Committee

Glynis Bryan – Chief Financial Officer

Stuart Fenton – President, Insight EMEA and APAC

Analysts

Brian Alexander – Raymond James

Matt Sheerin – Stifel Nicolaus

John Lawrence – Morgan Keegan

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2010 Insight Enterprises Incorporated earnings conference call. (Operator instructions.) I would now like to turn the conference over to your host for today, Ms. Glynis Bryan, CFO. 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 June 30th, 2010. I’m Glynis Bryan, Chief Financial Officer of Insight Enterprises, and joining me is Ken Lamneck, President and Chief Executive Officer.

If you do not have a copy of the earnings release that was posted this afternoon and filed with the Securities and Exchange Commission on Form 8K, you will find it on our website at www.insight.com under our Investor Relations section. Today’s call including the question-and-answer period is being webcast live and can be accessed by the Investor Relations page of our 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 webcasts contain time-sensitive information that is accurate only as of today, August 4th, 2010. This call is the property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Insight Enterprises is strictly prohibited.

Finally, let me remind you about forward looking statements that will be made on today’s call. All forward looking statements that are made in this conference call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in today’s press release and in greater detail in our annual report under Form 10K for the year ended December 31st, 2009.

With that, I will now turn the call over to Ken to walk you through an overview of our Q2 2010 operating results. Ken?

Kenneth Lamneck

Thank you, Glynis. Hello, everyone. Thank you for joining us today to discuss our Q2 operating results. I’m happy to report that continued strengthening of IT demand globally coupled with improved execution and operating leverage led to a strong year-to-year growth in both sales and profitability in our business. As we reported earlier today, consolidated net sales increased 23% in the Q2 to $1.3 billion, up from $1 billion last year; and on a constant currency basis, consolidated net sales grew 25%.

Gross profit was $173.8 million, up 18% from last year, and gross margin was 13.6%, down from 14.3% in the Q2 of 2009. Earnings from operations increased 104% to $44.7 million, or 3.5% of net sales compared to $21.8 million, or 2.1% of net sales reported last year. And net earnings and diluted earnings per share were $26.9 million and $0.58 in the Q2 of 2010, compared to net earnings and diluted earnings per share from continued operations reported in the Q2 of 2009 of $12.9 million and $0.28 per share.

We’re certainly pleased with those results and are proud of our team’s execution during the quarter. In North America the sales we made in our Hardware category that we began to see in the Q4 of 2009 continued into this quarter continued into this quarter, with gross margins also improving year-to-year in this category. High volume of sales of Software Products across several key publishers and slightly higher fees from enterprise agreements led to better than expected results in our Software category as well.

Services sales were down year-to-year as expected due to the effect of a large service engagement last year that did not reoccur this year. And these higher sales combined with continued expense management allowed us to more than double the earnings from operations in this segment.

By delivering these good results our North America team is also preparing for the rollout of the new sales engagement model that launched on July 1st. Now about one month after the launch I’m pleased to report there have not been any big surprises. Our planning team did a great job anticipating issues and our implementation team has been working hard to make sure the launch and subsequent milestones are successful. The new recently-focused sales organization is now live, initial training has been completed and the new management system has been adopted. While there’s more work to occur over the balance of the year I’m pleased about what we have accomplished thus far in this key initiative.

In EMEA for the second quarter we saw sales grow in constant currency across all Product categories. Our team there was successful in wining new clients during the quarter, particularly large enterprise space but also in public sector and middle market.

In our Product category we saw increased purchases of PCs and servers and Software Products from multiple publishers, including our largest Software partner. Demand in EMEA is beginning to improve and we are encouraged by the results we achieved in the quarter.

In Asia/Pacific sales increased 25% in US dollars and 14% in constant currency due to continued growth of public sector business and new sales wins in the middle market. I’ll now hand the call back over to Glynis who will discuss the Q2 operating results of our business segments.

Glynis Bryan

Hello again, starting with North America. Net sales were $866 million, up 21% from the Q2 of 2009. Sales in our Hardware category increased 27% year-to-year, reflecting higher demands across all client groups, but particularly in the very large accounts space. Software sales increased 21% compared to last year, due primarily to higher volume with multiple publishers, and higher true-ups from key public sector clients. Sales of services declined 15% due primarily to a large client engagement in 2009 that did not reoccur this year.

Gross profit increased 20% year-over-year to $120 million, while gross margin decreased to 13.8% from 14% in the prior year. Increases in plant margin of 97 basis points, driven primarily by sales in our Hardware category, were more than offset by declines in margin contributed from lower services sales and fees from software enterprise agreements. Gross profit and margin also benefited approximately $1.2 million from the elimination of certain restatement-related trade credits during the quarter through negotiated settlement or other legal release.

Selling and administrative expenses for North America in the Q2 were flat at $86 million compared to the Q2 2009, but as a percentage of sales decreased to 10% compared to 12%. The team continued its disciplined cost management efforts in the quarter, holding non-variable employee costs steady year-to-year while variable compensation costs increased $4.5 million on higher sales.

These results also included a $2.9 million benefit from a reversal of a reserve for bad debt taken in the Q4 of 2009 which has now been collected, and approximately $225,000 of professional fees associated with the trade credit remediation compared to $2.6 million in the same quarter 2009. And as part of the roll out of our sales engagement model in North America and plans to add new leadership in key areas we recorded severance and restructuring expenses of $943,000 in the Q2. There were no such charges in North America in the Q2 of last year. As a result, earnings from operations in North America were $32.3 million, or 3.7% of net sales in the Q2 of 2010, more than doubling from the $13.8 million reported in the Q2 of 2009.

Moving onto EMEA. Our EMEA reporting segment reported net sales of $359 million, up 28% in US dollars. In constant currency net sales increased 36%. Also in constant currency, sales of Hardware grew 18%, Software sales increased 44%, and sales of services increased 39% compared to last year, due primarily to higher volumes with new and existing clients.

Gross profit in EMEA was up 11% in US dollars and up 19% in constant currency terms, while gross margin decreased to 12.9% from 14.9% in the prior year. The decline in gross margin resulted from lower-pared margins, which includes under funding due primarily to price cut competition in the region, increased sales to enterprise and public sector clients, and a lower mix of gross profit from fee based enterprise agreements.

Selling and administrative expenses in EMEA in the Q2 were up 8% or $2.7 million in US dollars and in constant currency were up 14%. This increase year-over-year was primarily driven by higher variable compensation and sales incentives on increased sales. EMEA also recorded $375,000 in severance expense in the quarter compared to $1.9 million in severance expense recorded during the Q2 of 2009. As a result, earnings from operations in EMEA were $9.6 million in the Q2 2010, up from $6.1 million reported last year.

Our Asia/Pacific operating segment reported net sales of $53 million, up 25% from the prior year in US dollars and up 14% in constant currency terms. Gross profit was $7.7 million, an increase of 22% year-to-year in US dollars and up 10% in constant currency, while gross margin was 14.6%, down from 14.9% in the prior quarter.

Selling and administrative expenses in APAC increased 22% year-over-year in US dollars or approximately $900,000, and 8% in constant currency terms, as a result primarily of higher available compensation and sales incentives on increased sales. As a result our Asia/Pacific segment reported earnings from operations of $2.7 million, which was up 35% from the $2 million reported last year.

Our expected tax rate for the Q2 was 36.4% compared to 35.6% in the prior year and in line with our expected normalized tax rate.

Moving on to working capital metrics and cash flow performance. Days of sales outstanding was 71 days, down from 77 days in the Q2 of last year, due to the effects of a large public sector contract recorded in the Q2 of last year that did not recur this year and also improvements in our collection cycle. Days of payables outstanding decreased to 66 days from 75 days last year due to effectively this same public sector transaction and increases in sales of Hardware for which suppliers are typically paid in advance of collections from clients. In both periods DPO benefited from the timing of a scheduled supplier payment that was deferred early in the following quarter. As a result our cash conversion cycle was 12 days, up 1 day from last year and due to the payment timing differences was well below our targeted range of 20 to 25 days.

With regard to cash flow in the Q2, our operations generated $19 million of cash compared to $97 million for the same period in 2009, reflecting increased working capital requirements and higher sales and the payment of approximately $6 million to various states as part of our compliance with their unclaimed property program. During the Q2 we also invested $5.5 million in cap expenditures and paid $5.1 million to the former owners of Calence in the final side section of our earn out agreement. As a result we ended the quarter with $98 million of cash and $81 million of debt outstanding under our revolving credit facility.

In 2010 as market conditions continue to improve we expect that more working capital will be required to fund our growth. In fact, in the Q3, given the seasonality of the cash flows in our software business and improved sales of Hardware, we expect that we will use approximately $100 million in cash to fund operations.

Also on July 1st we enacted our $150 million asset-backed securitization facility and extended the maturity to April of 2013. We are pleased that we were able to obtain a multi-year commitment at lower cost and with increased borrowing availability through the amendment, and believe that we have sufficient capacity under our current debt agreements to support organic growth over the intermediate term.

I will now turn the call back to Ken for his closing comments.

Kenneth Lamneck

Thanks, Glynis. I wanted to talk about our 2010 outlook. Given our stronger than expected financial performance in the first half of the year we now anticipate that diluted earnings per share for the full year of 2010 will be between $1.30 and $1.40. This outlook reflects the following assumptions: continued strong demand for hardware technology in North America, partially offset by a decline of sales in services in 2010 due to the completion of a significant service engagement in 2009 that has not yet been fully replaced in 2010; and an effective tax rate of approximately 36% to 39% for 2010, up from 26% in 2009.

In closing, I’m pleased with our progress in the Q2 as we worked diligently to position ourselves for long-term growth in sales and profitability. With market conditions improving globally we look forward to carrying this momentum into the second half of the year.

That concludes my comments. We will now be open for questions.

Question-and-Answer Session

Operator

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

Brian Alexander – Raymond James

Thanks, and good evening and you guys had a very strong quarter so congratulations. I guess maybe to start out what surprised you in the quarter? Was it really just the demand strength that you saw in North America that surprised you? And how much of the strength that you saw in the Q2, Ken, would you say is driven by changes that you’ve made in the organization since you’ve been aboard versus really the strength of the cyclical recovery? And I guess related to that, what I was struck by was just the operating expenses which were flat sequentially despite growing gross profit dollars 20% in a business that has a fair amount of variable costs. So maybe you could just talk about the ability to hold expenses, and then I have a couple follow-ups.

Kenneth Lamneck

Thanks, Brian, I appreciate it. Also I’d like to mention, too, that Stuart Fenton, who’s the President of our EMEA and Asia-Pac regions has also joined us on the call, too. So if you have any specific questions related to those regions he can provide some color on those. Brian, in answer to your question in regards to the overall market, what we saw, I think certainly you’ve been seeing lots of announcements for the market, certainly it has had continued strength and we’ve been able to certainly participate fully in that growth that we’re seeing in the market. So that certainly has assisted us.

As far as what surprised us certainly I think the continued Hardware growth that we’re seeing in North America – 27% - that that continued from the prior quarters being strong as well. We hadn’t anticipated that fully as you would suspect as well. In the Software we had some very good strength in Software as well as a key publisher of ours ended their year and we certainly saw continued strength there in pretty much all three regions on the Software side of the house. So that was certainly a pleasant surprise that we certainly saw as well.

On the operating costs side of the house, Brian, we have had certainly some good discipline in and around to make sure that we’ve got our costs inline. We still think we have more opportunity there as well. And then to your questions as regards the changes that we’ve made, I’d say I’d certainly give the credit to the team and what they’ve been working toward for quite some time. At this stage there’s a lot of things that we’re currently working on, we’re not going to fully see all those benefits for a little bit of time as you well know, but I think the team overall executed extremely well and we’re very proud of the team for what they accomplished in Q2.

Brian Alexander – Raymond James

Is there anything specific that has changed over the past six months inside the organization that you could elaborate on, that perhaps contributed to the results that we saw this quarter? I’m just trying to get a little more specifics around what the team was doing differently now versus you know, six to nine months ago that led to this impressive quarter.

Kenneth Lamneck

I think there’s certainly, as we discussed in the last call there’s been a lot of heightened focus and awareness of the opportunity that exists specifically in the US market in and around our sales motion, our sales model, and how we basically are tracking that on a weekly basis; and the accountability that we put in place to really make sure that we’re looking at all opportunities and exercising the right judgment from a profitability point of view on those. So I think that continues to be part of the process, that continues to get stronger. We have not fully arrived by any means there, there’s still ample opportunity, but I think there’s, you know, a good sense, a good awareness of what we’re doing in that regard.

The sales leadership team I think is really coming into play in a nice fashion as far as how we’ve structured that. As we discussed last time we are actively recruiting for an SVP of sales so we’ve made some changes in that regard, and I’m currently heavily engaged on that side of the business and I really look forward to getting somebody in place to fill that role. And I think that’ll take us to, you know, further momentum going forward.

Brian Alexander – Raymond James

Okay. And then if I just were to focus on your guidance for a second for the year, I think it implies for the second half of the year about $0.52 to $0.62 in EPS if I’m doing my math right versus consensus of about $0.52. I think previously your full year guidance implied closer to $0.45 to $0.55 for the second half. So you’re slightly raising the back half of the year despite just beating most people’s expectations for the Q2 by $0.15 to $0.20. So I guess my question is why aren’t we seeing the magnitude from the upside from the Q2 flow through to Q3 and Q4? It doesn’t sound like you’re any less enthusiastic about demand; in fact, it sounds like perhaps you’re as enthusiastic if not more. So what are you assuming in your outlook that doesn’t reflect the continuation of the strength of Q2 specifically? Is it more about gross margins being unsustainable at current levels? Is it more about stepping up the pace of investment going forward or are you just being conservative? Thanks.

Glynis Bryan

Brian, this is Glynis. I’ll take a stab at answering that one. Sorry. So we talked a little bit about the large chunks of engagement that we had and it turns out that in Q3 and Q4 last year, those were the big quarters with regards to that specific services engagement for the year. The impact in the second half of the year is significantly greater than it was in the Q2 and in the first half of the year. Last year what we said was that that engagement contributed 90 basis points to the improvement in Q3 of last year and 27 basis points to the improvement in Q4 of last year.

Also as you look at our EPS guidance and the range that we’re giving we had a tax benefit in the second half of last year that we’re not going to see repeated this year, so our tax rate for last year was roughly for the full year about 26% and this year we’re anticipating it’s going to be in the range of 36% to 37%. That is a more normalized tax rate.

The other thing I guess is that we do anticipate that Hardware’s going to perform strongly. Hardware, we had a very strong Q4 at the end of 2009 so we don’t anticipate that on a year-over-year basis we’re going to see the same magnitude of an increase from a Hardware perspective, specifically on the Q4 that we’ve seen for the first two quarters of this year so far.

And then finally we’ve been pretty transparent with regards to disclosing the impact of trade credits as we’ve gone through and settled those, and in the second half of last year we had a $3.5 million benefit from a settlement of trade credit in 2009 and we’re not envisioning anything of that magnitude in the second half of 2010.

Brian Alexander – Raymond James

But it sounds like the stuff you just talked about relates to year-over-year changes and I’m really just concerned more about how the new guidance compares to the old guidance, cause presumably the old guidance would have included all the items that you just mentioned. And so I’m assuming that you built your forecast kind of sequentially off of most recent results and we just saw a quarter where you put up $0.58. And I guess what I’m asking is again just comparing the new guidance for the second half versus the old guidance for the second half, which was only given three months ago, it seems like you’re only increasing that by $0.07 or so for the second half despite just beating the Q2 by 20.

Glynis Bryan

So… Oh, I’ll let you finish, Brian.

Brian Alexander – Raymond James

I guess that’s just the question is why are we not seeing the upside in Q2 flow through to Q3 and Q4?

Glynis Bryan

So when we gave our guidance at the end of the Q1 we gave full year guidance for the year and we’re raising that full year guidance from $1.05 to $1.15 to $1.30 to $1.40, as you know. Several of the things that I talked about were already built into those numbers. As we’ve gone through the year we made some assumptions with regard to how we were going to recover from a services perspective, with regard to backfilling that large contract that we spoke about. We’ve not been as successful in that as we would have hoped so there’s a change that occurs as a result of our view with regards to what we’re going to be seeing from a services perspective as we continue throughout the quarter.

As you know, our services businesses is very profitable for us from a margin perspective, so even though we’re anticipating that we’re going to see continued strengthening in our Hardware it’s not the same magnitude of margin contribution and flow through to the bottom line that we’d anticipate coming through from services engagements that have not as yet materialized.

Brian Alexander – Raymond James

Okay. And then just the final question from me – it sounded like your product margins performed quite well, the product gross margins in North America, I think you might have said earlier a 90 basis point increase. Can you just talk about what drove that? Was that driven by better performance in backend because of the sales growth that you saw? Was it more a function of the mix within the Hardware? I’m just… That’s a very large increase on a year-over-year basis for product margins and I just wanted to understand it. Thanks.

Glynis Bryan

And it actually is both of those. So it is a function of just better absolute product margin as well as because of the magnitude of volume that we achieved in Hardware, actually hitting some gates with regard to our partners such that we received higher backend dollars as well related to that. So it’s a combination of both, of our just pure product margins being higher as well as incremental backend dollars that we received.

Brian Alexander – Raymond James

So going forward is there any reason to believe why North American gross margins can’t remain around these levels, you know, high 20…

Glynis Bryan

So there are a couple of things. One is it’s a big software quarter which always helps with regard to margins overall. So we had a big EA quarter which is 100% margins. As it flows through, as we go into the Q3 and why you see that big drop off from an EA perspective with regard to, what happens in regard to EA in the Q3 - we get a little bit of pickup again in the Q4 but not at the same magnitude that we saw in the Q2. And also in the Q3 and Q4, not to beat a dead horse but the large services engagement that we had actually ended up contributing 90 basis points as you said to the improvement last year and 27 in the Q4, and we’re not envisioning that we’ll have that this year.

Brian Alexander – Raymond James

Right, okay.

Glynis Bryan

And also in general overall services as I pointed out earlier in this outlook is going to be more muted than in our prior outlook in impacting margins.

Brian Alexander – Raymond James

Okay, great. I will get back in the queue. Thank you so much.

Operator

And the next question comes from the line of Matt Sheerin with Stifel Nicolaus. Please proceed.

Matt Sheerin – Stifel Nicolaus

Yes, thank you, and hello, everyone. So just a follow-up on Brian’s question about the guidance. So when you look at, you factor in the tax rate and the EPS guidance, that implies… And if you just look at normal seasonal trends in your business in September and December, that implies operating margins in the 1% to 2% range. And I understand on a year-over-year basis the service agreement having an impact and some other factors having an impact. But you’re still off of a significantly higher revenue base than you were so, and it sounds like you’re getting very nice leverage off of your expenses. So either gross margins are expected to decline significantly from the levels of the last couple quarters, or SG&A is expected to go up in an actual dollar basis significantly in order to get to those numbers. That’s the way I see it. Does that make sense or am I missing something?

Glynis Bryan

I guess what I would say, Matt, is that we envision that our gross margins are going to be declining in the second half of the year. So I think when we gave the guidance originally back in the Q1 what we ended up saying was that we envisioned for 2010 that our gross margins were going to be below 2009. That is actually still the case. I think that if you look across the various businesses we told you that we thought APAC was going to normalize around that 13% to 14% range in the last quarter. We think if you look at the run rate of what’s happening in EMEA at this point in time, there’s a run rate for the first half on EMEA as it relates to gross margins, it’s kind of indicative given the mix of businesses over there with regards to what’s going to be happening for the rest of the year.

And from a North American perspective in the second half of the year, given the mix of our business now which is more heavily weighted towards Hardware and Software, but primarily Hardware, than it is towards services, we envision that margins in North America in the second half of the year are also going to be down. In addition we’re going to be controlling expenses also so we’re not just assuming that the margin shortfall is going to flow all the way through to the bottom line but it is more of a margin driver than it is a growth and G&A driver to answer your question.

Matt Sheerin – Stifel Nicolaus

Okay, that’s very helpful, Glynis. So on the expense side then, as you are ramping business… And I know also, Ken, last quarter you mentioned that you had planned to invest in people and add some sales or account managers. So what should we be expecting in terms of those kinds of investments offset by any further cost cutting that you have? And how should we think about expenses over the next couple of quarters?

Kenneth Lamneck

Yeah, so as we mentioned, Matt, we did talk about adding specifically you know, thirty or more sales reps per quarter and we’re actually on track for that, so we’ve got that one class actually being trained as we speak for the start of the first group here; and they’ll actually within a month’s timeframe be on the sales floor. And we’ve got the next group being hired as we speak so we’ll actually go through that cycle here on a quarterly basis because we think that’s sort of the amount that we can badge and train and actually get indoctrinated to the business in the most efficient manner.

And we really obviously will see expense to that. We’ll start to see, towards the end of 2011 we’ll actually start seeing the benefits of those classes where there won’t be any sort of net negative impact to us; we’ll see the positive impacts going forward because we’ll have had enough classes in place so even the ones that are coming in will be offset by the increase in GP dollars. So it’ll be a little it of a drag here, certainly for the end of this year and for the first half of next year as well.

Matt Sheerin – Stifel Nicolaus

Okay. Are there any other expenses that you would expect to be incremental?

Kenneth Lamneck

For the remainder of this year? No, nothing out of the ordinary.

Matt Sheerin – Stifel Nicolaus

No, okay. Okay. And looking at Europe and the issue of the gross margin and the change of the business environment and the relationship with vendors, how do you see that playing out, Ken, over the next few quarters? And how are you structuring or changing your business to adapt to that environment?

Kenneth Lamneck

Yeah, let me ask Stuart Fenton, our President of EMEA to actually address that for you. Stuart, why don’t you handle that one?

Matt Sheerin – Stifel Nicolaus

Hi, Stuart.

Stuart Fenton

Hi, Matt. Certainly there is some seasonality quarter-to-quarter in our gross margins, and given the change in the mix of business, which now includes a little bit more public sector transactions which are typically at lower margins, we believe the run rate margin you see today is indicative of the gross margins you expect to see going forward. From that perspective we would anticipate to continue the growth in those segments.

Matt Sheerin – Stifel Nicolaus

Okay, but are you looking at sort of changing the business or changing the make of the business so that you can improve your margins?

Stuart Fenton

We certainly have initiatives. If you noticed that our Software growth in the Q2 was pretty strong, we had an aggressive focus on winning new accounts in that mid market space and we had a good few wins in the enterprise space. And those are fee-based initiatives and so we’ll continue that activity.

Kenneth Lamneck

And as you know on that, Matt, the public sector piece doesn’t come in at the fee-based level, right? It comes in as revenue. So that’s what certainly you know, mutes the gross margin percentages. We did see some good significant wins there in the public sector space in both Europe and Asia.

Matt Sheerin – Stifel Nicolaus

Okay, great. And then on, it’s still in Europe – I know that there’s some talk about some IT integration or upgrade in Europe. Can you give us the progress on that?

Stuart Fenton

Sure. The project, we’re still on track, we’re expecting the rollout to begin in the Q4 of this year and it will continue through 2011. And that will enable us to sell hardware in a bunch of other countries starting with a couple of countries, and we’re anticipating the contribution from that to begin next year, so pretty excited about that.

Matt Sheerin – Stifel Nicolaus

Okay, and there’s costs associated with that rollout?

Stuart Fenton

There are costs, yes.

Matt Sheerin – Stifel Nicolaus

Okay…

Glynis Bryan

All of which is included in our guidance.

Matt Sheerin – Stifel Nicolaus

That’s included, okay. Okay. So in addition to some of the investments in North America, the IT investments are also to be factored in?

Glynis Bryan

Yes, so to date as we’ve been doing the development a lot of the IT investments, a large grid of the future has been capitalized because we’re actually in development as we start the rollout. It’s actual hard dollars and actual costs hitting the P&L and those are incorporated in our guidance going forward. The roll out’s starting in the Q4 as Stuart said.

Matt Sheerin – Stifel Nicolaus

Well could you give us an idea of what are we talking about? Low single digit millions of dollars or a couple million a quarter or…?

Glynis Bryan

It’s nowhere near that magnitude.

Matt Sheerin – Stifel Nicolaus

Okay.

Glynis Bryan

It’s nowhere near that magnitude.

Matt Sheerin – Stifel Nicolaus

Okay. Okay. That’s helpful. And I think that’s it from me. Thanks very much.

Operator

And the next question comes from the line of John Lawrence with Morgan Keegan. Please proceed.

John Lawrence – Morgan Keegan

Good afternoon. Ken, would you discuss just a little bit maybe, since you started the engagement process, the sales engagement process in July 1, just give us a little bit more there of number one what you’re trying to accomplish, what you saw there; and as that continues on maybe some examples of is it more on the top line that progresses as a result or just streamlining and cuts expenses through the income segment?

Kenneth Lamneck

Yeah. Thanks, John, for the question. The, you know, so much of the hard work of course was done back in the latter part of Q1 and Q2 in getting prepared for it so the launch on July 1 as I mentioned went very, very smoothly for us. It’s basically given us better alignment on a regional basis with our partners. It’s also giving us the ability to have many of our reps in the US who sold primarily software, coming from sort of the Software Spectrum world and from the Calence world, only selling netowrkign products to now having the ability of course to sell the full product line of portfolio. So we certainly anticipate that that will contribute going forward with obviously added revenue, top line growth for us.

Additionally we really spent a good amount of time enhancing the support structure to get much better alignment of how our sales reps get support for these specific technologies that we’re very heavily focused in – areas like virtualization, data center, networking and collaboration, and what we’re doing in Software. And I won’t go into all the details there but that gives us the capabilities now where a sales rep can get very quick line of sight to the support that they need and the support they need to go out and make a joint sales call if necessary, with the kind of technical proficiency that they need in order to provide the right solutions. So a lot of work was done around that and the engagement model really does that.

But overall as we say with the whole engagement model our goal is you know, one team aligned to grow market share and enhance the client experience. So that really is the goal and objectives that we’ve put in place, so what you’ll really start to see is us to penetrate accounts further with our partners; and you’ll certainly see more top line. And we certainly don’t anticipate doing that at the expense of margins. Certainly whenever we do anything it’s got to be profitable growth.

John Lawrence – Morgan Keegan

So on the way you would monitor it is is that particular salesperson would have assumably more line items on the order. Is it that simple?

Kenneth Lamneck

Yeah. Certainly we do monitor and measure our sales reps to make sure of course we’re getting multiple lines of business from a specific client. In the past we weren’t structured for the vast majority of the reps, to actually even enable them to do that. And the engagement model now enables them.

Now that’s not going to happen overnight. We’ve also got alongside this of course lots of training that’s going alongside to make sure that our reps you know, can make this transition and sell effectively.

John Lawrence – Morgan Keegan

And the last question from me – you mentioned several other things going on to sort of help with the cost structure over the second half. Can you elaborate at all or is it too early?

Kenneth Lamneck

I would just say on the cost structure set, John, it’s really just continued discipline in our business of making sure that you know, our costs are aligned as efficiently as possible. And that’s just something that we have to do day in and day out. You know, really, independent of what the market conditions are it’s something we have to be diligent about.

John Lawrence – Morgan Keegan

Great. Thanks, congratulations.

Operator

(Operator instructions.) The next question comes from the line of Brian Alexander with Raymond James. Please proceed.

Brian Alexander – Raymond James

Okay, thanks. Just a couple follow-ups. On the 3.5% operating margin target that you talked about earlier in the year, we were I think hoping to get some more clarity around you know, sort of the path to that and the key milestones you hope to achieve to get there. Is that something that you still plan to articulate later this year?

Kenneth Lamneck

Yeah, very much so, Brian. I think we do have, we’re close to a date being set if I’m not mistaken in December, we’ll actually do that. So we definitely look to give you much more clarity on that.

Brian Alexander – Raymond James

Okay, and I assume at this point your confidence level, Ken, in getting to that level is still as high as it was if not higher?

Kenneth Lamneck

Yeah. I would say that hasn’t changed. I think we’re progressing according to the plan, and certainly our team was pleased that the current quarter that we could achieve that goal. The key of course is to be able to do it on a consistent basis long-term.

Brian Alexander – Raymond James

Okay. And then I think you mentioned earlier that you saw strength in large enterprise in North America. I was wondering if you could just comment a little bit about the SMB sector and what you saw there. And also just product segments that you felt were particularly strong in the Q2 and what you’re seeing so far in Q3.

Kenneth Lamneck

Yeah. So, Brian, on the growth side so far we definitely saw good continued growth on the enterprise side as well as across the SMB side of our business as well. So sort of all areas were certainly contributing well in regards to the growth that we were able to achieve.

On the products side certainly there’s continued robustness in the notebook and desktop category; that continues to do very, very well. I think the core networking infrastructure business will also continue to see very, very solid strength. Virtualization continues to grow very well and of course you can see in the Software categories we did very well with, the lead publisher in the industry did very well and we certainly participated. But we also saw certainly strength from some of the creative products out there in the Software category as well as I mentioned virtualization was very strong.

Brian Alexander – Raymond James

And is hardware availability an issue for you at all?

Kenneth Lamneck

No, it’s really not, Brian. We keep seeing issues that come up but it’s very, very minimal where we might see here and there an issue, but certainly marked improvement from where we saw maybe at the start of this year.

Brian Alexander – Raymond James

And then Glynis you said you’d use about $100 million in operating cash in the Q3. What did you say about cash flow for Q4?

Glynis Bryan

We didn’t say anything specific about cash flow for Q4 but I think as of right now what we’re envisioning is that we will end the year with probably positive cash flow from operations in the range of $30+ million.

Brian Alexander – Raymond James

Okay.

Glynis Bryan

And debt down largely from the level of last year.

Brian Alexander – Raymond James

Okay. Great. Thank you again.

Operator

There are no questions in queue. Ladies and gentlemen, this concludes the presentation for today. You may now disconnect.

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Source: Insight Enterprises, Inc., Q2 2010 Earnings Call Transcript
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