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

Insight Enterprises Inc. (NASDAQ:NSIT)

Q4 2007 Earnings Call

February 6 2008 5:00 pm ET


Glynis Bryan - CFO

Rich Fennessy - President and CEO


Brain Alexander - Raymond James

John Lawrence - Morgan Keegan

Alberto Mann - Thomas Weisel Partners

Mike Hue - Delaware Investments


Good day, ladies and gentlemen, and welcome to the Insight Enterprises Incorporated fourth quarter 2007 earnings release. My name is Lisa, and I will be your coordinator for today. (Operator Instructions).

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

Glynis Bryan

Thank you, Lisa. 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 and full year ended December 31, 2007. I am Glynis Bryan, Chief Financial Officer of Insight Enterprises and joining me is Rich Fennessy, President and Chief Executive Officer.

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

Since detailed financial and operating data are contained in the earnings release, we will only be concentrating on highlights of the quarter and full year during the scripted portion of the conference call. As usual, at the conclusion of the scripted portion, we will answer questions from our conference participants.

Today's call, including all questions and answers, is being webcast live and can be accessed via the investor relations section of our website at An archived indexed 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, February 6, 2008. 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 the actual results to differ materially. These risks are described in today's earnings release and also in greater detail in our Annual Report on Form 10-KA for the year ended December 31, 2006 and subsequent reports on Form 10-Q. Insight Enterprises assumes no obligation to update and does not intend to update any forward-looking statements.

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

Rich Fennessy

Thank you, Glynis. Hello everyone, thank you for joining us today. I am very pleased to announce that the overall performance of our geographic operating segments produced a solid fourth quarter, which provided a strong ending to a successful 2007. As expected our business delivered seasonally stronger fourth quarter and for the full year our overall financial results exceeded our own internal expectations.

Specifically our consolidated fourth quarter net sales were $1.28 billion, a 5% increase over the fourth quarter of 2006. While net earnings from continuing operations were $23.8 million, a 29% increase year-over-year. Additionally diluted earnings per share from continuing operations grew 30% year-over-year to $0.48, from $0.37 in the fourth quarter of last year.

Our acquisition of Software Spectrum, closed in September 2006, so our fourth quarter 2007 and 2006 consolidated results reflect a full quarter of that business on a year-over-year basis. Our strong financial results in the quarter benefited largely from the strength of our EMEA and APAC geographic performance, as well as our software and services category performance across all geographies.

Our North America hardware category struggled with growth in the fourth quarter, primarily driven by a challenging demand environment within our client stat and some internal sales execution issues.

For the full year 2007 our consolidated net sales were $4.8 billion, a 34% increase over 2006. Our gross margin on these sales increased to 13.8% from 13.1% reported in 2006. Earnings from operations increased 25% to $126.1 million from $100.5 million in the prior year and reported net earnings from continuing operations grew 13% to $72 million from $63.7 million in 2006.

Please recall that these 2007 results include expenses of approximately $15.6 million or $9.4 million after tax related to stock option review and severance and restructuring charges that we incurred in 2007, while the 2006 results reflect $2.3 million or $1.5 million after tax in stock option review and severance and restructuring charges.

We are very pleased with the overall financial performance of our business in 2007. Year-over-year our North American segment grew its net sales by 18% and net earnings from operations by 6%. Our EMEA segment grew its net sales by 87% and net earnings from operations an even stronger 93%.

While our Asia Pacific segment more than tripled its earnings from operations 260% increase in net sales. The reported earnings from operations of our EMEA and APAC segments accounted for more than 30% of full year consolidated results for 2007, up from 18% in 2006. We believe that this clear proof point that our strategies have diversified our profitability profile by capitalizing on global demand is working quite well.

Before I take you through our key initiatives for 2008, I would like to take a movement to reflect on the progress we have made over the last three years to realize our global trusted advisor or GVAR strategy and in fact those steps have had on our financial performance.

As I noted on our last conference call, execution of our GVAR strategy continues to focus on growing profitable market share, expanding our global footprint and continuing to build VAR-like solution capabilities by gaining deep expertise in high growth areas of enterprise software solutions, high performance servers and storage and networking and communications.

I would like to make a few comments about our progress in each of these areas. First we have been growing profitable market share through a combination of organic and acquisitive growth our business has grown significantly over the past few years on both the top line and most notably on the bottom line. Net sales have increased from $2.7 billion in 2004 to $4.8 billion in 2007. While gross profit margins have increased from 12% to 14% over the same period.

Earnings from operation are nearly doubled from $67.6 million in 2004 to $126.1 million in 2007. These results reflect our transformation from a peer product fulfillment business to global technology solutions business then includes a more profitable mix of sales from both the product category and geographic perspective.

Next, we have been expanding our global footprint. In 2007, net sales outside of North America were approximately 30% of our consolidated net sales, up from 19% in 2004. With the acquisition of Software Spectrum in September of 2006, we now operate in 22 countries around the globe. And as a result, we have a broader international footprint than most of our competitors. As we experienced in 2007, our global footprint enables us to gain profitable market share by meeting the needs of our global clients and benefiting from the higher growth regions across the world.

Finally, we have been developing VAR-like solution capabilities in key solution areas. In order to deepen our relevance to our clients and secure more of their annual IT spend, we've pursued a focus strategy to develop or acquire deep expertise in high growth areas of enterprise software, high performance systems, and networking and communications.

While we continue to sell a wide array of products to our clients, the basic core of our business, we've taken very specific steps to secure more expertise in key IT solution areas. Over the last three years, we've created a services organization with Insight, a more than 600 IT trust advisors. These Insight teammates are dedicated to providing technical expertise from the beginning of the client engagements all the way to the deployment of the IT solutions within our clients businesses.

In 2007, our services business generated approximately $108 million of net sales up from $54 million in 2005. I think you can clearly see that Insight has undergone a significant transformation over the last three years. Throughout this change has delivered very strong financial results. Let me take this opportunity to thank the 4,700 plus teammates in the Company for their hard work and commitment to positioning Insight as a leader in our industry.

As we now head into 2008, we believe our business is healthy and well-positioned for continued success. Our strategic and operational goals for 2008 will remain consistent with those we have been pursuing over the past several years. Specifically, we will continue to build our VAR-like solution capabilities, both organically and through targeted acquisitions like the one we announced a few weeks ago.

Calence is a leading provider of Cisco networking solutions in the United States, including networking products, professional services and managed services. This strategic acquisition once significantly enhanced our tactical capabilities around networking and will enable us to capture a leading position in the fast growing networking category.

Additionally, we'll continue to leverage existing client relationships. Over the past few quarters, we've been building metrics and tracking the progress of our efforts to cross-sell into our existing client-base across our solution sets of hardware, software and services. Early results indicate that when a client buys across multiple categories, the net sales and profitability of that client increases significantly. We find these early results promising and expect to continue to establish cross-selling as the mantra of our sales organization.

Next, we will develop and implement a strategy to extend our reach into new client segment, specifically the small business segment. Historically, our SMB clientele was comprised of, primarily of clients with over 500 seats. We've created a special team of account executives focused solely on the 50 to 500 seat small business market with metrics, methodology and offers that will address the unique needs of this clientele.

This market provides incremental opportunity for Insights specifically in the United States. Also in 2008, we will work to expand our global capabilities like expanding our services capabilities in key countries in Europe as well as Asia Pacific to leverage existing software client relationships and enhance our profitability.

And finally, we will drive operational efficiencies in our business and improve our return on invested capital by continuing our IT systems deployment, streamlining key business processes and improving our working capital processes. Additionally, we will continue to deploy capital in a very disciplined way as we execute our 2008 goals.

Now, I ask Glynis to provide more details on our fourth quarter and full year 2007 performance across each of our operating segments. Glynis?

Glynis Bryan

Thank you, Rich. Starting with North America. The North America net sales decreased 4% from $880.8 million for the fourth quarter of 2006 to $844.1 million for this quarter, due primarily to a decrease in software and hardware net sales, partially offset by an increase in sales of services. Software accounted for the largest portion of the decrease as we continue to see a shift to more enterprise software agreements with only an associated agency fee being recognized in net sales versus gross revenue recognition.

As we have previously indicated, we expect this trend will continue and will probably increase going forward. We also continue to see strong growth in our services category which grew by 37% year-over-year, and as Rich noted earlier, our net sales in our hardware category declined 2% due to the challenging demand environment within our client set and internal sales execution issues.

Overall, gross profit grew 1% despite the decline in net sales during the quarter. Please recall, given that certain products and services, such as software maintenance contracts, and third-party warranties are recorded as a net sales under GAAP, and that there is a continued shift to Microsoft enterprise software agreements, for which we only receive an agency fee. We believe gross profit dollars is a more meaningful measure of growth.

Our software and hardware categories performed well in the quarter and contributed to our gross profit improvement. For the full year North America net sales increased 18% from $2.85 billion in 2006 to $3.36 billion in 2007 due primarily to the acquisition of Software Spectrum in September of 2006, as well as organic growth in our hardware and services categories.

Gross margin during the fourth quarter increased to 13.8% from 13.1% in the fourth quarter of 2006. This increase was due primarily to an increased in agency fees for Microsoft enterprise software agreement renewal and the higher margin associated with our services business.

For the full year North American gross margin increased to 14% in 2007 from 13% in 2006. Growth in our services and software categories due primarily to the acquisition of Software Spectrum was the primary driver of our gross profit dollar growth of 27% year-over-year.

Selling and administrative expenses as a percentage of net sales were 10.9% up from 10.3% in the fourth quarter of 2006. This increase was predominantly a result of the lower net sales base in the fourth quarter of 2007 and some duplicative costs associated with our back-office operations tied to our MySAP upgrade.

As we mentioned in our third quarter call we believe that a more deliberate and client specific approach to the deployment of MySAP will prove to be more successful for our business overtime. The key objective for 2008 are to address client interruption incurred in our SMB client set in the US as a result of the migration and to improve those clients web experience.

We will not achieve the benefits associated with the systems implementation until we complete these objectives and we anticipate this will occur in the second half of 2008. For the full year selling and administrative expenses as a percentage of net sales were 11.3% in 2007, up from 10.1% in 2006. This increase in selling and administrative expenses in 2007 was primarily due to higher salaries and wages, legal fees and commissions.

North America selling and administrative expenses for the three months ended December 31st 2007 and 2006 include expenses of approximately $0.3 million and $1.6 million respectively for professional fees and costs associated with our stock option review. For the full year such professional fees and costs amounted to $12.5 million in 2007 and $1.6 million in 2006.

Overall North American earnings from operations for the three months ended December 31st 2007 remain relatively flat compared to the same period last year at $24.7 million or 2.9% of net sales for the fourth quarter 2007. For full year our North American segment achieved a 6% increase in earnings from operations from $82.2 million in 2006 to $87.3 million in 2007.

As a reminder full year 2007 includes professional fees and costs of $12.5 million previously mentioned as well as approximately $3 million in severance expenses. Full year 2006 included the $1.6 million previously mentioned plus severance and restructuring costs of $508,000.

Our EMEA operations recognized excellent results during the quarter. Net sales were up 28% from $317.9 million in the fourth quarter of 2006 to $405.7 million for this quarter due primarily to a 36% increase in software sales, but also a very strong performance from our hardware and services categories which grew 11% and 28% respectively.

The strong performance in EMEA included higher sales across all categories and the benefit of currency exchange rates between the weakening US dollar year-over-year, as compared to the various European currencies in which we do business. EMEA's positive net sales growth in all the three categories in the fourth quarter 2007, helped to have a comparable increase in gross profit of 27% compared to the fourth quarter of 2006.

For the full year EMEA net sales increased 87% from $710.3 million in 2006 to $1.33 billion in 2007 due to both organic growth and as a result of our acquisition of Software Spectrum in September of 2006.

Our fourth quarter gross margin in the EMEA segment remained consistent at 12.2% for the three months ended December 31, 2007 and 2006. For the full year EMEA gross margin decreased from 13.4% in 2006 to 12.7% in 2007. The decrease in gross margin from 2006 was primarily due to decreases in the product margins, which include vendor funding and decreases in supplier discounts.

These decreases in gross margin were partially offset by increases in agency fees for Microsoft enterprise software agreement renewal. Growth in our software and services category due in part to the acquisition of Software Spectrum, as well as growth in our hardware category contributed to gross profit, dollar growth of 77% year-over-year.

Selling and administrative expenses as a percentage of net sales were 9.1% in the fourth quarter of 2007 a decrease from 10% in the fourth quarter of 2006. The decrease from the fourth quarter of 2006 was primarily due to increases in net sales. Selling and administrative expense increased by $5.4 million from the fourth quarter of 2006 to the fourth quarter of 2007 primarily due to higher foreign currency exchange rates, higher compensation costs due to additional sales headcount and increased bonus experienced due to overall financial performance in EMEA.

EMEA's selling and administrative expenses for the year ended December 31, 2007 include expenses of approximately $500,000 for professional fees and costs associated with our stock-option review. Overall, our EMEA segment achieved earnings from operation of $12.7 million in the fourth quarter of 2007, up 79% from $7.1 million in the fourth quarter of 2006. Further on a full year basis, earnings from operations grew 93% to $33.3 million in 2007 from $17.3 million in 2006, a very impressive performance from our EMEA segments.

Additionally, fourth quarter 2007 includes a $606,000 benefit related to a reduction EMEA's restructuring liability for the remaining lease obligation on a previously vacated office property following a successful renegotiation of a portion of the long-term lease during the quarter. This amount was partially offset by $177,000 of severance expense during the quarter. EMEA's 2006 earnings from operation include severance and restructuring expense of 221,000.

Moving onto APAC. Our APAC segment recognized net sales of $33.5 million, recognized growth profit of $7.2 million and contributed $2.7 million to earnings from operations in the fourth quarter 2007. These results reflecting increase of 43%, 84% and 222% as compared to the fourth quarter of 2006. We continue to be excited about our APAC segment, which is performing very well and continue to post strong results and growth in net sales and profitability. In 2007, our APAC segment contributed a $107.8 million in net sales, $20.7 million in gross profit and $5.5 million in earnings from operations to our consolidated results.

Moving on to our effective tax rate, our effective tax rate from continuing operations for the fourth quarter 2007 was 37.5% compared to 37.7% for the fourth quarter 2006. Our effective tax rate from continuing operations for the full year 2007 was 38.5% compared to 35.2% for 2006. The effective tax rate for the full year is higher in 2007 due to an increase in our income tax reserve. Further, our 2006 effective tax rate reflects the reversal of accrued income taxes resulting from the determination that are reserved previously recorded for potential tax exposures was no longer necessary.

Our net foreign currency exchange gain was $1.1 million in the fourth quarter 2007 compared to a gain of $587,000 in the fourth quarter 2006. These gains result from foreign currency transactions, including inner company balances that are not considered long-term in nature. The increase in the net foreign currency exchange gain is due primarily to increases in business transacted outside of the US and the continued decline in the value of the US dollar against currencies we transact business in, specifically the Canadian dollar, the Euro and the British Pound sterling.

From a cash flow perspective, we generated very strong operational cash flows for the full year 2007. Operating activities provided approximately $100 million in cash. Our strong operating cash flows along with $28.6 million from the sale of PC Wholesalers enabled us to not only reduce our outstanding debt by $52 million, but also funded a $50 million repurchase of our common stock during the year.

Capital expenditures were in line with our expectations at $35.8 million for the year, a 4% increase over 2006 and primarily related to expenditures for MySAP upgrade.

That concludes my comments, and at this time, I'll turn the call back over to Rich for a few additional comments before we take questions. Rich

Rich Fennessy

Thanks Glynis. I'd like to wrap up today's call with a brief recap of the highlights in the fourth quarter of 2007. We had very strong performance in both EMEA and Asia-Pacific, which offset performance in our North America hardware category and contribute to overall net sales growth of 5%. This clearly demonstrates the key we have for diversification benefits of our global strategy. Our software and services categories continued to deliver strong results across all geographic segments and helped fuel our profitable performance. This demonstrates the product category with diversification benefits of our solution strategy.

We delivered growth in total gross margin dollars up 10% year-over-year and increased our gross margin percent by 60 basis points with 12.9% to 13.5%. Total earnings from operations increased 23% and operating margin improved from 2.7% to 3.1% of net sales. All this resulted in a 30% improvement in diluted earnings per share from continuing operation and we ended the year with a strong balance sheet with capacity to support our strategic objectives.

As a result of our caveats in our business model and the momentum we built in 2007, we are pleased to provide the following financial guidance for 2008. We expect organic net sales to grow faster in the market growth rate, which we expect to be approximately 5% on a world-wide basis, and 2008 fully diluted earnings per share are expected to range between $1.80 and $1.95 of which 50% to 55% is expected to be recorded in the first half of the year.

These expectations reflect the following assumptions; An effective tax rate of 37% to 39% for the full year, completion of the $50 million stock repurchase program authorized by the Company's Board of Directors in November 2007, and cash outlays for capital expenditure of approximately $30 million to $35 million.

At this time, Glynis and I are happy to answer any of your questions.

Question-and-Answer Session


(Operator Instructions). And your first question comes from the line of Brian Alexander from Raymond James.

Brian Alexander - Raymond James

Thanks, good evening, guys. Rich, just a clarification, is there anything baked into your guidance for '08 for Calence?

Rich Fennessy

Calence from an EPS perspective is baked into the guidance, because if you remember on that call we said it's going to be neutral to slightly positive, so from an EPS perspective that is baked in. In terms of the organic growth rate growing faster than the market, which we said the market is going to earn a worldwide that will grow 5%. The net sales that we will pick up from Calence are not included obviously in the organic statement.

Brian Alexander - Raymond James

And I understand your objective to grow faster than the market, but if we kind of just look at how you've been trending, in North America 70% of your business and in the fourth quarter hardware and software both declined. And in fact hardware didn't grow in all of 2007.

You talked about having some execution issues and maybe you can go into a little bit of detail on what those are and how quickly they will get fixed. And we are probably going to have a more challenging economy in '08 than '07. So I am just wondering what gives you the confidence that you can grow above that mid single-digit range?

Rich Fennessy

Yeah. A couple of things Brian, but first of all relative to the primary strategy and that is kind of on a geographic level, leveraging the footprint that we have now. So that allowed us to grow 5% in the fourth quarter, which is obviously very strong EMEA as well as very strong Asia Pacific performance, we see that continuing. In fact we are making investments to ensure that continues.

And obviously some of the sales execution issues that we ran into in North America, specifically in the fourth quarter we believe are short term in nature. I mean real simple, kind of that's boil down, what sales executions issues boil down to is, from a net new transaction in respect of terms of winning new business, new hardware transactions, we were not as successful in the fourth quarter as we would like.

So as we go into 2008 from a first half perspective we are putting plans in place, everything from sales incentive programs to smart aggressive bid desks to go out after the opportunity. With that said the hardware business is the only thing from a growth perspective in North America that we’re concerned about.

From the services business perspective that grew extremely well in the quarter and from a software perspective as you know we look at GP dollar growth as the significant measure there. And overall from a software business performance both in North America as well as worldwide, we feel very good about our fourth quarter results.

One of the things coming off of our third quarter earnings call that you will remember, because I think you may have asked the question is obviously what happened in the third quarter and really the conversation was, hey we miscalled the seasonality of our software business, as a result of that we have seen lower results from an earnings per share perspective than we would like.

But we said our expectations are that that software business will return to strength in the fourth quarter, they will have a strong fourth quarter, they will over achieve our full year expectations for the software business which is exactly what happened.

So as you look to growth in total, how are we go to, continue to grow faster in the market, which we believe is 5% is returning to some growth in North America, but also leveraging the global foot print that we have, specifically with EMEA and Asia Pacific, as well as continuing the growth we've seen off of our services business, which will help us go drive the EPS that we included in our guidance.

Brian Alexander - Raymond James

Well I guess back to the guidance, if we're looking at this range of $1.80 to $1.95, how would you characterize the key twin factors that could put you at the low end versus the high end? Is it more a function of growth or is it more a function of margin? And I ask this, because if I just put an 8% growth rate in for 2008 it still appears like you are expecting anywhere from 20 to 50 basis points of margin expansion. And I'm just trying to better understand where that would come from in terms of gross margin expansion or OpEx leverage, because if I look for all of 2007 it doesn't look like we saw any operating margin expansion in that period?

Rich Fennessy

Yeah, obviously we saw significant gross margin expansion. But you are right. Some of the costs that we had specifically relative to our back office operations and some of our IT upgrades clearly didn't allow that gross margin expansion, we saw to flow down to operating margins to the extent that we would like. As we go into 2008, clearly we see gross margins continuing to improve as we continue to do what we did in 2007, which is change the mix of our business.

So as we continue to grow services faster than we have historically and as we look to continue to grow our software business we see gross margin opportunities. So that's part of the biggest factor inside of the guidance continue to drive gross margin. Now obviously there is an assumption there that we are going to also grow faster than the market of 5% and from our perspective as we look to the comment we made earlier and to just leveraging our geographic footprint as well as driving some improvements in our North America business, we believe that's also reasonable.

Brian Alexander - Raymond James

Just to go back to the software and then I'll get back in the queue. It sounds like you are pleased with how the software business performed. I know it's very well in Europe but even in North and in Asia, but even in North America sounds like you view this as a bounce-back quarter, but we are still down 11% in terms of revenue versus a year ago, and I know there are some issues in terms of gross versus net and I don't think we have an update for looking gross profit dollar growth. But am I characterizing that right that you're pleased with the bounce back because I am still struggling to understand why it were still 11% and we should be benefiting from cross-selling relative to a year ago.

Rich Fennessy

We are very pleased with our software results in North America, EMEA, Asia-Pacific and on a worldwide level, so it bounced back. We saw strong results on the software business. And again, what you are seeing in North America, an 11% decline versus that statement is really the growth in that discussion that our gross profit growth and the agency fees, although, we recognize as a result of Microsoft transaction the business directly enhances, thus not recognizing the revenue, but just recognizing GP dollars is exactly what happened in North America, which is why you see that disparity between revenue growth and our confidence and how the business returned to strength in the fourth quarter.

And again from a full year perspective, as we got out (inaudible) at the end of the third quarter, we believe that we are going to exceed our goal that we put in place from the software for the full year in the fourth quarter right coming back from what we missed in the third quarter and that's exactly what happened.

Brian Alexander - Raymond James

So, we did grow gross profit dollars, I should say you grew gross profit dollars in North America in software in Q4?

Rich Fennessy


Brian Alexander - Raymond James

Okay. Thank you.


Your next question comes from the line John Lawrence from Morgan Keegan.

John Lawrence - Morgan Keegan

Good afternoon.

Rich Fennessy

Hi, John.

John Lawrence - Morgan Keegan

Congratulations on the quarter, Rich. Could you comment a little bit -- Glynis, could you just give a sort of a breakdown in the CapEx for '08 please?

Glynis Bryan

Sure. Our CapEx for '08 is going to be in the range of about $30 million to $35 million. And most of that is related to the continued mySAP upgrade.

John Lawrence - Morgan Keegan

And Rich, would you take Brian's question just one step further only execution issues. How much of that as far as the goals for '08 of going back and giving those relationships squared away with those execution issues took place, that was part of the decision to delay that rollout. Can you talk about that a little bit? Who was affected and how difficult it is to reestablish those connections?

Rich Fennessy

Sure. John, those are really tied back to the, what we called out in the last call is that what we experienced in the third quarter was some impact to the web business specifically with our SMB clients given the way we are running the rollout in terms of bulk migration. We took them all to a brand new website and they didn't react too well, to that web experience and hence, basically, what we did in the fourth quarter relative to that mySAPs, we put everything on hold and basically had the whole organization focused on closing out the year.

As we go into the first half of 2008, we are going to continue to go a pile of sixes from the SMB web perspective, which will be for the most part implemented here in the first quarter. And then as we go into the late part of the first quarter into the second quarter, we see us being able to get some return off those fixes we put in place in terms of winning back some of those web clients. As related to the overall mySAP program, we kind of took the fourth quarter off to go make sure we focused on closing out the year strong, we've been retooling our plans.

So basically, at this point, we're looking to go finish the rollout through the summer time of 2008. So when we provided guidance of 50% to 55% of the full year in the first half because if you go back and do the work, you'll see that we did actually 58% in the first half of 2007, if you exclude stock option and legal expenses et cetera. Basically, one of the bigger two things that drive in our view that the first half from a full-year perspective will be less as the percentage of the total and those two things are; we do see a slower demand environment in the first half, compared to the growth rates we saw in the first half of 2007. As companies basically are going to be rationalizing and releasing perhaps slower, their IP budgets given just the uncertainties in the US economy specifically.

And second is, some of the back office costs that we have on board today. They are still there in the forth quarter and will continue in the first half because we are still growing our hardware and services business of two systems; the old SAP and the new mySAP. Those costs are going to be there throughout the first half of the year. And they are about $1 million to $2 million in the fourth quarter and those are going to continue in the first quarter as well as in the second quarter. And that's really what drives that 50% to 55% kind of separation from a range. And one more thing because this is the first time we're giving guidance, so I just want to provide my perspective on it.

We believe that the concept of providing guidance from EPS perspective and on a fully basis is very positive from our investor perspective. Because it gives our investors the confidence and understanding of where management sees the business playing out on a fully year basis for 2008.

Our second positioning in terms of trying to provide a first half point of view, as we believe our business as we now as the broader part of our business in software, it is primely more appropriate to look at our business on a half year cycle versus quarter-by-quarter. So we believe going forward, it's more important to think about how does the company do over six-month period than Q1 versus Q2, just because of some of the key transactions and how they can flow from one quarter to another quarter. So, that's why we come up with a guidance and provide additional clarity, what we believe is going to be true in the first half which again will be 50% to 55% of the full year and the full year being $80 to $95.

John Lawrence - Morgan Keegan

And just a couple of other housekeeping, as far as the [leading] your internal guidance for the fourth quarter, would that be because of EMEA and APAC?

Rich Fennessy

Yes. Our fourth quarter performance in terms of the star performers in the fourth quarter was clearly EMEA and Asia Pacific, they maxed out in terms of execution and just did a wonderful job. And by the way, EMEA each quarter in 2007 maxed out and did a great job and Asia Pacific three of the four quarters maxed out the bonus plans we put in place. So our international footprint, which is to me really showing that the strategy of diversifying geographically is really working for us, was the big driver in our performance in the fourth quarter. Which you know gives me the confidence as we talk about growing faster than the overall market growth rate of 5%, So we continue to get that growth outside the North American geographies.

John Lawrence - Morgan Keegan

Thanks a lot. Good luck.

Rich Fennessy

Thanks, John.


(Operator Instructions). And your next question comes from the line of Alberto Mann from Thomas Weisel Partners.

Alberto Mann - Thomas Weisel Partners

Yes, hi this is Alberto Mann calling for Matt Sheerin. Can we start up by talking about the recently announced share buyback, which you announced in November? Can you tell us how much you've done so far to date?

Rich Fennessy


Glynis Bryan

We've actually been in a blackout period as a result of the Calence acquisition and then leading up to this fourth quarter earnings release. So we haven't started that program yet and we anticipate starting it depending on market conditions as soon as we are out of this blackout period.

Alberto Mann - Thomas Weisel Partners

Okay, great and then, in terms of Asia hitting up nearly 10% operating margin in the region last quarter, what's the sustainable operating margin for the full year in Asia going forward it seems to be out performing in other regions?

Rich Fennessy

And the reason why it is outperforming the other regions, it's purely a software and services mix. So what you see in EMEA is software, hardware and services and with a very large percentage coming from software and also, you see all three in North America. So the biggest reason why you see the operating margin difference, is just because of the mix of products, Asia Pacific just being software and services.

And overall as it relates to the fourth quarter results for Asia Pacific, they did have a very strong result; not to say that every quarter that we run at that level, but we have a lot of confidence in that business model going forward.

Alberto Mann - Thomas Weisel Partners

So is it on a full year basis. Is it mid single-digits or high single-digits of sustainable model in that region assuming you don’t add hardware?

Rich Fennessy

Yeah, I really don’t have that actual number in front of me.

Alberto Mann - Thomas Weisel Partners


Rich Fennessy

What I mean, to me as you go back and look at the results that will be published, I mean there is no reason to believe and you bonded out that number. There is no reason to believe that anything is unique that says that model doesn't continue going into 2008.

Alberto Mann - Thomas Weisel Partners

Okay great. And then you just talked a couple of questions ago about your feelings on the first half being a little bit more sluggish and the outlook obviously and the economy is more cautious these days. What gives you confidence that there will be sort of a rebound in the second half?

Rich Fennessy

Not necessarily a rebound, my personal view and I think IDC data is still and we look at IDC as well as Gardner its sources. It's still pointing to a worldwide growth of 5%. They don’t necessarily breakout 1Q, 2Q versus the half. My editorial comment is the fact that I believe that we are going to see a slower first half versus the second half, just from the pure simple idea that as companies have CapEx budgets are they releasing those on the same schedule they normally would? My guess is many, many companies aren't going to be, because they will be looking at kind of what's going on in the overall economy. So my sense is 1Q and 2Q has a tendency to be slower than what we will see on the full year basis.

Alberto Mann - Thomas Weisel Partners

Okay great and then just lastly I don’t know if you can, but if you could quantify the approximate contribution of Calence to the EPS guidance that you provided assuming the deal closes on April 1st as you said?

Rich Fennessy

Again as we called out in the Calence call, it's neutral to slightly above, so don’t view that as basically contributing very little.

Alberto Mann - Thomas Weisel Partners

Okay great. All right thanks.


Your next question comes from the line of [Mike Hue] from Delaware Investments.

Mike Hue - Delaware Investments

Yeah I was just wondering what metrics will be used to determine management's compensation for '08, more specifically is there a return on invested capital metric included in there?

Rich Fennessy

Sure. Let me just give you a quick summary of the comp plan in total. From an incentive bonus perspective outside of, obviously, base salary, 60% of people's incentive bonus is tied to hitting quarterly earnings from operations target, 40% of the range of incentive target is tied to an annual performance plan, which has supporting financial metric inside of which is ROIC. So every executive in the company will have return on invested capital in their annual performance plan for 2008, and it will be one of the metrics that we use to determine their 40% payout at the end of the calendar year 2008.

As it relates to our equity program, our equity program is tied to hitting earnings per share targets for the year. It's related to return on invested capital, clearly, we got some new leaders from a financial organization perspective inside the company. Glynis joined the team. Her along with Karen McGinnis, our Chief Accounting Officer are going to take the work we've already started on return on invested capital and continue that in terms of just a focus area for the company in 2008. We actually believe we made some good progress in 2007. But with that said, we still think there are a lot of opportunities for us.

Mike Hue - Delaware Investments

Okay. Two follow-up questions. The 60% of the comp related to quarterly EPS that seems high to me. You don't provide quarterly EPS estimates to the street. Doesn't that kind of force your managers to run the business on a quarterly basis rather than for the long-term, just wondering why that number is so high? And then the second question, in your ROIC calculation, are you including goodwill in that calculation?

Rich Fennessy

As relates to the first part of the question is 60% tied to quarterly results. As you know our business is a daily business. So each and every day you got to come in and figure out how you can go drive more sales and get the gross margins up of those sales, and how are you going to keep your expense structure in line. So we believe very strongly that has been a quarterly aspect to our comp plan, our key people focused on not just the quarter but the day-by-day activities that drive the quarterly results. So at this point in time, we don't see any change out there. Because I think it drives the right kind of results oriented behavior inside of the company. Relative to your question on return on invested capitals include goodwill or not?

Glynis Bryan

Yes it was. Yes it was.

Mike Hue - Delaware Investments

Okay. Thank you very much.


There are no further questions at this time. I would now like to turn the call back over to Rich Fennessy for closing remarks.

Rich Fennessy

Well, thank you very much for joining today's call. Again, we are very pleased with the results we were able to share with you today as it relates to our fourth quarter as well as to our overall 2007 results. And actually more importantly, the results we share with you that kind of fits in perspective for you, what is a team we've accomplish from 2004, although, we are up here to 2007.

I mean the kind of growth we saw from a topline perspective, 2.7 going to 4.8, any 200 basis points to our gross margin and significantly growing our earnings from operations dollars. Again, we are a leadership team and hope you have the same feeling of accomplishing a lot over the last three years in terms of transforming our business and again we're looking forward continuing that as we go into the future. So again thank you very much. I'll look forward to talk to you on the next call.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. 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 All other use is prohibited.


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

This Transcript
All Transcripts