PC Connection Inc (CNXN) 2002 Q3 法說會逐字稿

Good morning, and welcome to the PC Connection sponsored Third Quarter Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. I would now like to turn the floor over to your host, Mark Gavin. Sir, the floor is yours.

Thank you. Good morning, everyone. This is Mark Gavin, CFO. Thank you for joining us today for PC Connection's Third Quarter Conference Call. If you've not already received our press release, you may contact Irene Gregman (ph) 603-423-2322; and a release will be faxed or e-mailed to you, immediately. You may also view the release on our website. Today's call is also being webcast. It is available on PC Connection's website and on "streetevents.com." Before I turn the call over to Pat Gallup, Chairman and Chief Executive Officer of PC Connection, I'd like to inform our participants that any statements or references made during the conference call that are not statements of historical facts, they'd be deemed to be forward-looking statements. There are a number of important factors that could cause actual events or the company's actual results to differ materially from those indicated by such statements. These factors include but are not limited to those identified under the caption "factors that may effect future results and financial condition" in the company's annual report on Form 10-K, dated December 31st 2001, which is on file with the SEC. And now I'll turn the call over to Pat Gallup, Chairman and CEO of PC Connection.

Good morning. Thanks, Mark. Good morning, and thank you for joining us. Also here with me on the call, in addition to Mark Gavin, are Ken Koppel, President; and Bob Wilkins, Executive Vice President. We're very pleased to report improved profitability this quarter coupled with improving overall sales and performance. Net sales for the quarter were 341 million, up about 17 percent from Q2 of this year and up about 9 percent from Q3 of 2001. Excluding net sales for MoreDirect, third quarter net sales were 271 million, an increase of 14.3 percent compared to Q2 of this year. Earnings were 9 cents per share compared to earnings of 1 cent per share in Q2 and earnings of 8 cents per share in Q3 2001. Excluding earnings for MoreDirect, third quarter results of operations would have been a loss of 1 cent per share compared to the second quarter 2002 loss of 5 cents per share. As the numbers demonstrate, we are making steady progress in restoring all of our business segments to profitability. In the marketplace, we continue to see encouraging signs that many of our customers are cautiously and collectively resuming spending for information technology products, though certainly not at the levels of 2 or 3 year ago. With our tight focus on operational affluence, we believe that we can and will continue to improve our financial performance over the coming quarters.

We continue to be focused on several key objectives, which we have reiterated frequently in the recent quarters -- maintaining and enhancing our financial stability, sharpening our sales and marketing execution, aggressively reducing our operating costs, pressing (ph) for future growth and prosperity, and remaining alert for additional market consolidation opportunities. As Mark will highlight in a moment, our financial position remains very strong. Our sales and marketing strategies are beginning to produce results, and we will stay the course. Our investments in new website technology are producing improving sales results. Sales generated through our Internet business account program increased 37 percent sequentially in the third quarter over the second quarter of this year. On the cost side, we continue to adjust staffing and spending levels in all areas of our operations.

Finally, we remain alert for opportunities in a consolidating market. But we will only consider acquiring businesses with similar corporate cultures, which add new customers and management talent, and that are immediately accretive to our earnings and key operating ratios. In summary, our financial recovery continues. We remain confident that our efficient rapid response business model will be the winner in serving the information technology needs of businesses and government and educational organizations. We also remain fully committed to insuring long-term customer satisfaction, as well as, delivering increasing shrink shareholder value. And now, Ken will review with you some of the third quarter sales and marketing highlights. And then, Mark will report on some additional operating metrics and the state of our balance sheet as well as update you on our outlook for the balance of 2002. Ken.

Thanks, Pat, and good morning everyone. The near-term sales and marketing strategies that we set out for you last quarter are working. Those strategies are: to improve the productivity of our small and medium sized commercial business, to achieve results from recent investments in our government and education business, and to support the continuing sales success of our recently acquired subsidiary, MoreDirect. Our results for Q3 continue to demonstrate improving sequential trends. Net sales are up significantly from Q2. Average order sizes continue to improve. Gross margins improved in our SMB segment, although those improvements were offset by competitive pressures in our government and education business. And sales account manager productivity continued to move up. Sales to government and educational organizations grew 50 percent sequentially during the quarter, our strongest seasonal quarter. Sales for the federal government increased 92 percent sequentially, although they were down about 5 percent from last year's unusually strong Q3. Sales to state and local government and educational customers also improved substantially, 19 percent sequentially and 20 percent year over year. Sales in our large account segment grew sequentially by 30 percent in Q3, as MoreDirect, acquired during the second quarter of this year, continues to perform ahead of our expectations. Sales in our SMB segment were flat with the second quarter, similar to our results in Q2. We have a large and stable base of customers in this segment, and we are adding new customers, and we are rapidly upgrading our capabilities to serve SMB customers.

For the third quarter, our gross margins were 10.9 percent of net sales compared to 10.8 percent of net sales in Q2 and 10.8 percent in the third quarter of 2001. Gross margins in our SMB segment were up 72 basis points, due primarily to improved detainment of vendor volume incentive rebates and lower discounting of free charges to customers. Public sector gross margins declined about 37 percent basis points, as we focused on sales growth in those markets in the face of intense pricing competition. Gross margins in the large account segment were up 42 basis points at 10.8 percent. Our ongoing efforts to improve product margins continued to emphasize enhancement of add-on sales for accessories in consumables, increasing sales of enterprise class products as a percent of total net sales, increasing account penetration with PC Connection and third-party value-added service offerings, and a greater focus on solution sales. Average order size increased about 17 percent sequentially to $1,323 in Q3, from $1127 in Q2 of this year while increasing about 5 percent from $1,259 in Q3 of 2001. Excluding MoreDirect, Q3 average order size increased over 17 percent from Q2. Average order sizes have now improved two quarters in a row after previously declining gradually for several quarters in the commercial business. Total orders entered another fundamental operating metric also increased during Q3 to 314,000, a 3 percent sequential increase over Q2 and a 5.8 percent increase over the third quarter of 2001. In the combined sales organizations, we ended the second quarter with a total of 511 outbound sales account managers, compared to 521 account managers at June 30, 2002 and 496 at the end of September 2001.

We continue to steadily recruit new account managers and expect the total number of account managers to remain relatively flat over the next several quarters. Our goal is to improve the performance and incomes of our existing account managers rather than merely adding to their numbers. Excluding more direct, average annualized sales productivity per account manager increased from $2,001,000 in Q2 to $2,329,000 in Q3, a 16 percent improvement. Our goal continues to be an overall 50 percent improvement in sales productivity from the levels of 2001. MoreDirect also reported a sharp sequential increase in annualized account manager productivity to $3,800,000 in Q3 from $2,992,000 in the second quarter. As large commercial customers continue to respond favorably to MoreDirect sufficient e-procurement model. On the products side, Q3 results saw sales growth sequentially in all product categories, several in double digits, with software and notebook computers leading the way with sequential sales growth rates of 33 percent and 18 percent respectively. Most product categories also demonstrated significant year over year sales growth with only notebook computers and networking product sales lagging the levels of Q3 2001. Software sales grew sequentially by $13.4 million. Sales of Microsoft products grew by $7 million, aided by the July 31st deadline for the sale of Microsoft's upgrade advantage products. The remaining growth in software sales was spread among several different vendors. In Q3, net sales of enterprise class products were 22 percent of total net sales compared to 23 percent in Q2. As I noted last quarter, the acquisition of MoreDirect has accelerated our mix shift to enterprise products. Year over year net sales of such products grew in Q3 by 27 percent. We continue to devote significant resources to the expansion of our enterprise class product offerings and believe that additional growth is achievable in this area. And now, Mark will provide you with some further details about our operating metrics and financial position. Mark.

Thanks Ken. Continuing with our review of third quarters operating metrics, average selling prices or ASP for computers systems increased during the quarter by about 2 percent compared to the third quarter of last year and roughly about approximately 2 percent compared to the second quarter of 2002. The sequential increase resulted primarily from a 23 percent sequential increase and service systems ASPs. Service ASPs also increased 38 percent year over year on 79 percent higher unit volumes. Desktop Computer ASPs were down 6 percent sequentially this quarter after an 18 percent sequential increase in Q2. On a year over year basis desktop ASPs were down about 2 percent. Notebook ASPs increased about 4 percent both sequentially and year over year. Notebook unit and net sales volumes were up sequentially by 17 percent and 22 percent respectively. Desktop revenues rose 5 percent sequentially on a 12 percent sequential increase in unit volumes. We are especially pleased this quarter that all three-system categories showed significant sequential improvement both in unit sales volumes and net sales dollars. Selling, general and administrative costs or SG&A came in for the quarter at 9.6 percent of net sales compared to 10.5 percent in the second quarter of 2002, and 9.3 percent in the third quarter of 2001 primarily due to changes in sales volumes excluding more direct the actual dollar amount of SG&A was flat compared to the third quarter of 2001 and increased about 6 percent compared to Q2 of 2002 as a result of higher sales volumes.

Continuing cost reductions in our core business for us setoff (ph) by increased expenditures on marketing and sales activities. All pending plans and programs remain under continuous review. Now lets take a look at the balance sheet. Cash balances were 40 million. Accounts receivable were up 31 million to 143 million at September 30th, 2002 compared to June 30th, 2002 due to primarily the sequential increase in net sales. Day sales outstanding or DSOs were 50 days compared to 48 days in Q2 and 40 days in Q3 of last year. Inventory balances increased by 9 million or 20 percent to approximately 53 million at September 30th 2002 compared with approximately 44 million at June 30th 2002 and were up 2 million compared to approximately 51 million at September 30th 2001.

Customer plans for product staging and some other large orders were the primary reasons for the increases. Net sales or product struck ship by distributors and other vendors directly to customers accounted for 42 percent of total net sales in the third quarter compared to 34 percent of total net sales in the second quarter of 2002 or the Federal Government and a large commercial account businesses utilized drop shipping heavily to meet customer demand. Inventory turns with 24 compared to 22 in Q2 based on quarter end levels inventory days were 16 as of September 30th versus 15 at June 30th. Inventories are in excellent condition both in quantity and in quality.

In summary the balance sheet remains very healthy. Looking forward our outlook for quarter -- for fourth quarter of 2002 remains cautiously optimistic. Our third quarter results indicate that sales to SMB customers are stable but not yet growing again. With our current mix of business we expected the third quarter rather than the fourth quarter will be our seasonally strongest quarter. For the fourth quarter of 2002, we presently expect to achieve sales in the range of 315 million to 325 million and earnings per share in the range of 6 cents to 9 cents per share. We are expecting only a slight improvement in gross margin rate for Q4 and operating expenses should be down slightly if they come out of a strong Q3. We presently do not anticipate providing guidance for 2003 and so we report our results for fourth quarter fully February of 2003. We'll continue to work hard to ensure the best possible short-term results consistent with maintaining strong financial position and investing for the future. Before we open the call for questions, I'd like to explain the change in the revenue recognition practice that was described in the press release. T

he company implemented SEC Staff Accounting Bulletin number 101 in revenue recognition and financial statements or FAS 101 on January 1, 1999. Consistent with our historical practice, the company continued to record revenue at the time of the shipments concurrent with the passes of title. The company's historical practice also has generally been to cover to customer losses and damage to shipments in transit. Reserves are established at the end of each quarter to cover estimated losses for shipments in transit to customers at the end of each quarter. Our outside auditors recently informed us that under SEC Staff Interpretation or SAB 101, revenue should not be recorded until delivery because the company covers losses for in-transits, resulting a defect of title passes at the time of delivery. Although the effect of this change in economy policy application to record revenue at the time of delivery rather than the time of shipments are not material to any prior fiscal year or quarter, the cumulative effect over retroactive adjustments in the current quarter would have been material to the current quarter's operating results.

Accordingly, the company will amend its annual report on Form 10-K for the year ended, December 31st 2001, and in Form 10-Q for the period ended March 31, 2002 and June 30 2002 to reflect this change in revenue recognition practice. To assure full and final disclosure, we have provided detailed schedules as attachments to the press release shown as quarter-by-quarter and year-by-year adjustments to our reported results necessary to reflect this change. Thank you for joining us this morning, and we'll now entertain your questions. Operator.

Thank you. The floor is now open for questions. If you have a question or a comment, please press the number "1" followed by "4" on your touch tone phone. If at any point, your questions have been answered, you may remove yourself from the queue by pressing the "#" key. The questions will be taken in the order they are received. We do ask that while you pose your question that you pick up your handset to provide optimum sound quality. Our first question is coming from Bruce Simpson from William Blair. Sir, please state your question or your comment.

Hello. Good morning.

Good morning.

Morning, Bruce.

I have two questions. One is, you mentioned price competition in the public sector business and I wonder if you can elaborate a little on whether that's particular to the federal government market, whether that's something that's relatively new, or always takes place in the third quarter? Thanks.

Bruce, this is Ken. I think we would describe it as across each of the public sector markets. So it's not unexpected, but it is apparently increasing.

And to what do you ascribe that -- just sort of an increasing number of competitors targeting those marketplaces?

Yes, exactly so.

Okay. And then I would also like to ask about the DSO. It seems like it's up considerable year over year. How do you attribute that?

On a year-over-year basis, in each (inaudible) some of the adjustments, we made for the revenue recognition adjustments. Really what's been going on this year is our DSO has been a little bit higher in the government sector. You know, we had a name change, and we also had some issues with respect to how those will be in process in the federal government area. We expect that as the year continues that we'll make improvements on getting those processes in a timely manner. It's really in the government sector. The DSOs in the commercial SMB segment and in MoreDirect are quite normal compared to prior years.

Okay. And then I guess one more thing. Microsoft Upgrade Advantage -- can you give us any more detail about -- you said exactly, how many millions of dollars are contributed, I think -- how is Microsoft Software selling after the expiration of that program in August, September, and the early part of October? Is it govern of a cliff or is it just a minor adjustment, how do you characterize that?

I would say it's performing similar to the way it performed in the first quarter and the early part of Q2 for us. We did not take advantage of this -- the upgraded assurance program until late Q2 and early Q3. So I'd say it's performing at levels that we saw in the early part of this year. When you look at the -- Bruce, to give you a little bit more color on this or what I meant to our results this quarter -- it impacted our margins, I mean, about 4 basis points when you back out Microsoft licensing overall. So our margins would have been like 10.86 percent compared to the 10.9 percent level; and it would have adjusted our earnings. We had about 2 cents improvement in earnings this quarter related to Microsoft, and it's really related to the July 31st expiration.

Thanks a lot, and congrats on your quarter.

Thank you.

Thank you, Bruce.

Thank you. Our next question is coming from Brian Alexander from Raymond James. Brian, please state your question or your comments.

Good morning and nice quarter.

Thank you, Brian.

Thank you.

Morning, Brian.

How should we think about the seasonality (ph) of your sales with respect to your guidance in the fourth quarter? Should we assume that the entire sequential decline is related to a falloff in the public sector and that -- or direct and SMB will be flat to up or how would you characterize it?

Yes, we'll give you some color on that. I would say SMB should be flat to slightly up. Public sector should be down about 15 percent, open, federal and in the state and local education. And we look at the MoreDirect -- I expect MoreDirect to continue to have sequential improvement. They had a great Q3. I don't expect in my guidance that they're going to have the same type of performance. I hope they will, but I'm assuming right now about a 5 percent sequential increase in their business.

And in talking a little bit more about MoreDirect, 30 percent sequential increase is very robust. Would you say you're seeing an increase in spending from large accounts or is this purely share gain on the part of MoreDirect?

I would say it's both. I think the large accounts that they carried for sometime, we saw some increased activity from them during the quarter; and also they are gaining share with adding new customers.

And my last question relates to HP. I know there's still a lot of confusion about the dangers related to partner one, which should get rolled out soon. But one of things that we're hearing is that larger resellers, like yourselves, could actually benefit from the changes because, perhaps, they're concentrating more support funds in larger players as opposed to smaller players. Any validity to that, and how would you -- what would you comment about that?

Hi, Brian. This is Bob Wilkins. As in our first part, we are still going through the numbers and trying to understand what we've got; but, initially, it does look like it's recent from our part as far as backend dollars succeed in our sales levels. The initial pricing point we've come out -- interestingly, they are very competitive with Dell right now. It's the first time we've seen a brand new manufacturer actually come into that price point. So we are seeing some interesting quotes and bids come out that are more competitive in that line, as we're for hoping to take market share or at least quote share with some of the Compaq-HP brand right now.

And then, my last question relates to productivity. Some nice improvement, sequentially, and it looks like you're on track to achieve your goals. How much of this productivity improvement is due to mix of tenure as opposed to just raw improvements by tenure?

Brian, it's Ken. I think it is both. Our tenure indeed has moved up. Mark has the specifics, but I believe it's from something like 16 months to 24, 25 months over the last nine-month period. That's what...

Yes, Ken, that's correct. Right.

So, certainly, that is very significant to it. But on top of that, there have been a variety of programs introduced into the sales organization. And I believe the productivity at most levels of tenure has been increasing. Kind of, things we've spoken about -- focus on new account generation, for example -- all of these things are starting to kick in.

Mark, would you care to share with us what's your current percent of reps by year -- you know, less than one year, one to two years, and greater than two years?

Brian, I don't have that data handy right at the moment. But, obviously, I'll be happy to do that with you.

Okay. Thanks a lot, guys.

Thank you. Our next question is coming from Chris Hussey from Goldman Sachs. Please state your question or your comment.

Good morning, gentlemen. A question -- and ladies, I apologize -- a question on the September sales. Maybe you can characterize how September held up relative to the rest of the period ex the government? I would imagine the government sales were pretty strong in September. But kind of give us a sense of the small, medium sized business. Did you see it just generally fall off as the enthusiasm surrounding the Microsoft program waned or was it roughly flat with what was going on in July?

Yes. Let me describe to what happened on a total basis for July, August and September than on a sales per day. July was around 108 million, August was about 115 million, and September was 117 million. So the sales per day actually increased in September because you only had 20 selling days in September versus 22 both in July and August. So the sales per day -- it looked like, more like 4.9 million in July, 5.2 million in August, and 5.9 million in September. So it builds during the quarter.

And Mark that's your total sales and I would have expected, I guess the September sales to be strong with the government up so...

Right.

...sequentially. If you had to pull out the government what it would look like?

If I pulled out the government, we just look at by segment for example, on a sales per day for SMB would have been like 2.8 million in July, 2.5 million in August and back up to 2.8 million in September. So, July was high because of the Microsoft deadline, August preformed as expected. In September, we had the expected uplift that we typically see at end of the quarter for SMB, and MoreDirect had a -- it was fairly similar -- they had -- they do not have the big participation in Microsoft. So, there were around 9.33 for July, 1.2 million for August and 1.2 million for September. So, their sales build also during the quarter.

And when you look at that September SMB of 2.8 million this year, how did that compare with a year ago?

I would say it -- a year ago it would have behaved in the similar percentages -- similar numbers.

That's pretty encouraging, I mean, that suggest that, you know, overall your small medium-sized business customer really wasn't getting the impact of too much by this Microsoft program. Would you characterize us the case?

The way we've been characterizing in the past is that there was really a share shift in what they were purchasing instead of buying some hardware during July. They were buying software. So, we don't think that their customers were stealing from future purchases during the -- for future quarters or for future quarters.

And then the last question along this lines. When you look at October, is it holding up that -- those sales per day?

October is performing, as we would expect October to be performing at this point.

Okay. And then also last kind of questioning is on the SAB 101 change. Did you not adopt this change for the third quarter?

We did adopt it for the third quarter. We've just seeing the third quarter numbers is that -- is just the change between what we deferred to 30th compared to September 30th, so the change between those two periods would have been reflected in the third quarter.

So, in the third quarter, the end of the period, when did you close out your sales then in the third quarter? Did you still close it out?

We closed it out at September 30th but we went back and looked at when that customer has actually received delivery of the shipments before last week of September and if they did not receive it in the month of September those sales were deferred. We did the same calculation for the end of June. So, some June sales got deferred into the third quarter, and some third quarter sales got deferred into the fourth quarter. And they were pretty similar amounts. I think on a net deferral basis it costs the third quarter about $1 million in sales.

So, yes because the September quarter would've added some head (ph) start on the federal government, I imagine in the June.

Yes. That's right.

But on the margin basis because of the federal government margin's pretty well may be favored the quarter a little bit?

For that deferral, no. I would say it would've been similar amounts. The federal government, they were already on destination in the previous periods. So it's really just looking at our SMB segment with this deferral really impacted.

And then the last question, well (inaudible) if you had to guess, you know, is it two days, three days roughly that you differ now.

It's three days.

Three days differ. Great. Thanks guys, congratulations again.

Thanks.

Thanks.

Thank you. Our next question is coming from David Manthey from Robert W Baird. Please state your question or your comment.

Hi, thanks, good morning. I was wondering as it relates to the restatement, first of all the period we're talking about here, is it from January 1st of '99 to the present?

It's from -- yes, David, yes it's from January 1st '99 to the present.

Okay and the 2 cents -- I'm just trying to understand where that arises from? Given that if your sales are shipped and they're delivered and I understand there's some returns involved but where does the 2 cents delta rise from?

David, if we made those adjustment in the third quarter, it did not re-stay prior periods that's where the two cents arise -- arrives from. So if we deferred say $12 million of revenues in the third quarter and it's not adjust prior periods, we would have cost us around 2 cents per share for this quarter. And so that would have been material to the 9 cents that we reported, and therefore, we had to push it back to the prior period. If we had more earnings this quarter and that 2 cents against the higher earnings level would have been considered immaterial and therefore, we could have just made this adjustment during the quarter in our prospective basis.

Got it. Okay. And on MoreDirect, what would the year over year increase have been on the sales. Do you know that number?

Yes, it would have followed (ph) it around 20 percent.

20 percent year over year.

Right.

And the productivity improvement, if you could just remind me again at -- from what point are we looking and at what level are we looking for this 50 percent improvement from?

We are looking for a $2 million base level that we started to describe it back in 2001, and we're looking to get that back up to $3 million level.

Right okay. All right and then the average order size in SMB excluding MoreDirect was higher and I understand, we're talking about an increase in tenure and productivity and everything else but may be you could help me understand the increase there? That seems to be what you're trying to do here is to improve that average order size and if you just talk about some of the factors that are going into that, is there more cross selling, up selling, what's behind that?

Well, this is Ken. There is a concentrated effort on cross selling and up selling on attachments on the sales floor and in the web and other tools that we provide to our sales people. So, we believe we are beginning to see that and that's a significant part of this figure.

All right. Thanks very much.

Once...

Thanks, David.

Once again, if you do have a question or a comment please press "1" followed by "4" on your touch tone phone at this time. Our next question is coming from Matthew Shreenin (ph) from Thomas Weisel Partners. Please state your question or your comment.

Yes, thank you. Concerning your ASPs, which were up, it seemed to be up across the board particularly in the server side, how much of that has to do with product mix? And do you see any trends there?

Matthew, can you state the question again please?

Yes, sure. The question was regarding your ASPs, which were up in the quarter across different product lines. Particularly on the server side, I'm just getting a -- trying to get a sense of how much that had to do with product mix particularly as MoreDirect was successful selling into enterprise and as you saw increase of sales into the federal government?

Don't think I know the answer to the question, but we'll happy to research it for you. Do you want to add more on that, Bob?

No, I can just say in servers we did see a band increase on server sales. We did move upscale on some of the server particularly in accounts (ph) pay and some of the SMB space. On other product lines in the notebook and desktop arena, we did see some movement again upward and bending as far as ASPs were concerned, enabled more (inaudible) took those prices up. But I think, we'll go back and research all that for you.

Okay, thanks. And then also -- I know your drop shift from your vendors to customer was up. If you could give us an idea of what percentage of your procurement came from distribution and how you see that trending going forward?

It's -- distribution, now I have to guess that it's approximately 50 percent of our purchases during the quarter will come back up from distribution.

Okay, thank you.

Thank you. Our next question is coming from Sterling Wathy (ph) from Morgan Stanley. Please state your question or your comment.

Good morning. A few quick questions if I could. For housekeeping and you may have already mentioned this and I apologize if you did. But did you mention the mix between your Mac and PC platforms?

We did not mention that. Let me get you that number. It was -- around 7.25 percent was Apple related and 92.75 was Wintel related.

The Apple related percentage continues to come down. I think at the end of 1998, it was about 19 percent or I think it was 9.5 percent in last quarter. Is this -- how do we think about that as? Are you just focusing more on your PC Wintel business or there're some other reasons why the Apple business may be falling off?

I think the reason why it's falling off is that we're focused on small and medium sized businesses and on the large corporate accounts through MoreDirect and in the federal government arena, and we don't see a lot of Apple business in that arena, that tends to be for a small -- a very small businesses, SOHO and a consumer and that's not the -- where our focus is on growing the business.

Okay. My next question is related to the government space. You guys have put up a strong numbers in the public sector as have many of your competitors and I guess, my question is, are you starting to run up against some of the other direct marketers in the public sector space or are you continuing to take share from the smaller regional and local bars, in which case, you and the other direct marketers will be able to continue this strong growth?

I think this is a booth (ph) answer. Again, we're certainly coming up against the larger direct marketers. But at the same time, especially in the state and local business, we certainly are competing with local bars and I believe winning the share.

And my last question if I could. To switch topics for a second, this Microsoft has really caused investors a great deal of concern. I guess there could be two schools of thought. One would be that customers buying Upgrade Advantage in front of the 7/31 deadline may have pulled other product sales forward with their Upgrade Advantage purchases. And I personally based on my check; don't believe that's the case. Another school of thought is that customers were allocating a larger percentage of their IT budgets to Microsoft products in front of 7/31; in which case, post 7/31, other product sales may actually be a boost, as customers' IT budgets free up a little bit. Do you have any color that you can help us out with?

Yes. I think we would favor the second of your two options. We certainly saw that IT management was consumed with the Microsoft decisions to be made and, in many cases, surprised by how much they had to pony up. So from our perspective, it was the only game in town. You know, either you sold a Microsoft upgrade or you simply weren't going to sell anything else.

Great and very helpful. Thank you.

Thank you. Our next question is coming from Bruce Simpson from William Blair. Please state your question or your comment.

Hi. And it's a follow up to the prior questioner's line -- along those, the public sector business in particular. And I wanted to follow up the comments that, I think, Ken made so that I understand this. The price competition that you've mentioned -- is that -- you know, is that largely as a result of our -- the other direct marketers attacking the space in the Federal government? Is price competition just as intense in the other sectors? And also I think, if I interpreted your answer appropriately, the level of competition among the other direct marketers is higher in Federal than it is in state, local. Could you just comment on those things?

I think the level of competition is strong in both cases, but there is a lot more local wars in the sled area to -- that we come up against. Also, you got to recall that we have made significant investments in our sled business increasing the number of account managers there.

So given, kind of, the well publicized concerns about state budgets and the financial pressures at the state level and without giving any kind of specific guidance, just how are you thinking about the next year or couple of years in your public sector business? Where is the real opportunity when you factor in? You know, what level of competitive saturation there is in pricing and likely spending? Is it clear that either the public for the sled is going to be advantaged over the other one? Thanks.

I think, overall, on our public sector business, we remain very optimistic. Our share is so small. So while your point on public sector budgets being shrunk, of course, is a major factor. There is a great of market that we've just never participated in before. So we believe we can continue to grow because of that. We expect the pricing pressures, of course, to continue, and we simply have to deal with them.

Thank you.

Ladies and gentlemen, there appear to be no further questions at this time.

This is Pat Gallup. Thank you for your questions and for your interest and support. Have a great day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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