Insight Enterprises Inc (NSIT) 2002 Q1 法說會逐字稿

Good afternoon, my name is

and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Insight Enterprise Inc., first quarter financial results and Comark acquisition conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press the star and then the number 1 on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key. Thank you. Mr Laybourn, you may begin your conference.

Welcome everyone and thank you for joining the Insight Enterprises conference call. Today we will be discussing the company's earnings results for the quarter ended March 31, 2002 and the acquisition of Comark, Inc., announced earlier today. Today, joining me is Stanley Laybourn, Chief Financial Officer, Tim Crown, CEO of Insight Enterprises, Inc. If you have not received the earnings announcement or acquisition press release that was e-mailed or faxed to you within the past hour, you will find it on our website, www.insight.com, under our investor relations section or you can call for one at 480-350-1602. Since detailed financial and operating data is contained in the earnings release, we will only be concentrating on highlights of the quarter during descriptive portion of the conference call. As usual at the conclusion of descriptive portion, we will answer any questions that our listeners may have. Today's call including all questions and answers is again being webcast live on our web site under Company FO/Investor Relations/Conference Calls and our indepth copy of the conference call will be available on the Investor Relation Section of our website approximately 2 hours after completion of the call and will remain for approximately two weeks.

This conference call and the associated web cast contain time sensitive information that is accurate only as of today, April 25th, 2002. This call is the property of Insight Enterprises, Inc. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of Insight Enterprises Inc., is strictly prohibited. Finally, let me remind you about forward-looking statements that might be made on today's call. Our most recent earnings release under 10K containing discussions relating to risk and forward-looking information. Any forward-looking statements that are made in this conference call are subject to risk and uncertainty that could cause the actual results to differ materially. Now, with all that being said, Tim will begin by providing you with an overview of our first quarter's results. Tim ....

Thank you, Stan. Hello everyone and thank you for joining us. As you can see by our first quarter earnings release and press release announcing the acquisition of Comark, Inc., we have had a very exciting and successful quarter. Overall, we increased diluted EPS sequentially by 27% to $0.28 per share by increasing our market share, focusing on gross margin, and reducing operating expenses. Part of the reason for our bottom line success in Q1 was that we successfully integrated action into our United Kingdom operations and amidst the integration successfully posed a 3% operating profit. Although we had a very successful quarter amidst an economy that had shown little, if any improvement. Last but certainly not least, we are extremely excited to announce the acquisition of Comark Inc., a $1.5 billion technology solutions provider.

This acquisition increases Insight Enterprise' s presence as a major player in the industry and a leading global provider of IT products and services. We will talk more about this dynamic transaction later in the call. First, let us discuss the results of operations for the first quarter, 2002. Starting with Insight Direct Worldwide, Insight's overall sales during the first quarter of 2002 were $502.3m down 5% year over year and relatively flat sequentially. Insight continues to operate in an environment of economic weakened active spending in United States, which began over a year ago. While we believe the economic environment in the United States is not getting worse, we are not willing at this time to concede that it is improving. During Q4 of 2001, we implemented various enhancement initiatives that provided to be successful in 1Q02.

This coupled with the successful integration of our acquisition in Canada and United Kingdom resulted in an impressive 52% increase in the Insight's net earnings sequentially. As said earlier, our United Kingdom operations posted a 3% operating profit reaching the lofty goals and an impressive improvement over essentially break even results last quarter. During the second half of 2001, we adjusted our model to reflect the current economic environment in United States and as a result we reduced our level of account executives and support staff relatively over that period to a level that supports the expected 2002 growth. These reductions were accomplished mainly through normal attrition and performance measured matrics.

Cost savings from these adjustments were fully realized this quarter. As of March 31, 2002, Insight has 1477 accounts executives of which about 1197 are serving North America and 280 serving in United Kingdom. This is down from 1518 account executives at the end of 4Q01, of which about 1199 were serving North America and 319 serving in United Kingdom. The reduction in UK was a result of the completion of the integration. The average tenure of an Insight account executive overall in March 31, 2002 is now 2.0 years compared to 1.2 years at March 31, 2001. Additionally, only 62% of our sales executives have less than 2 years experience, 17% have 2-3 years and 21% have an excess of 3 years experience. This is compared to 81%, 8%, and 11% respectively a year ago. As a result of the noted adjustments, we saw an impressive 10% plus productivity improvement in our account executives as compared to a year ago. We continue to be encouraged by this metrics as well as sales productivity increases dramatically with experience and we see that our initiatives to increase retention are paying off. Our goal is to continue to drive up retention rates of our top performers throughout the company.

We will continue to focus on maximizing gross profit. This increased focus companywide resulted in the increased gross profit of Insight as the percentage of sales to 12.0% up from 11.1% in 1Q01 and 11.6% in 4Q01. The vast majority of the increase in product margin is due to a team effort by our sales and product management employees to enhance the profitability of every sale. Now let us look at product mix and average order size. Overall, demand for desktops and notebooks has declined over the past year as small to mid-size busineses apply a wait-and-see approach to the portions of their IT spending. We continue to believe that customers are lengthening their replacement cycles due to the uncertainty in the general economy. This decline is acutely apparent in our product mix where desktops and notebooks now only represent 29% of Insight's net sales.

Software sales continue to be strong at 14% of net sales as we expect to see continued strength in software in the foreseeable future. Similar strength will be more evident in the gross margin than revenue as sales of software assurance products and Microsoft enterprise licenses which were recorded as net revenue continued to grow. Pricing is still competitive. The manufacturers continue to team with Insight and other resellers to assist in providing competitive prices without compromising profitability. Additionally, Insight continues to utilize the Internet as a time and cost reducer for both our customers and our suppliers.

During 1Q02, unassisted Web sales accounted for 14.2% of sales compared to 12.5% in the prior year. The company's outsourcing subsidiary, Direct Alliance Corporation, continues to be a strong contributor to the overall success of Insight Enterprises. Direct Alliance contributed 2.5 million in net earnings in the quarter, up 10% from 1Q01. Now I will turn the call back over to Stan Laybourn for some comments about our financials and various operating statistics.

Thanks Tim. Overall, net sales declined 5% compared to 1Q01 and were flat compared to 4Q01. Sales at Insight our direct marketing operations declined 5% over 1Q01 and again were flat with 4Q01 while Direct Alliance, our outsourcing operations declined 2% from 1Q01 and again was flat with 4Q01. Insight accounted for about 95% of sales in the 1Q, with sales from Direct Alliance representing the remaining 5%. Now let us look specifically at Insight. Insight's North American sales declined 22% in 1Q02 compared to 1Q01 due to a decrease in average selling prices. Sales of certain software product offerings in 1Q02 recorded as net revenue and a conscious decision to walk away from unprofitable sales. Compared 4Q01, sales in North America declined less than 1%. Sales in Europe increased 221% over prior year due to the acquisition of Action in October of 2001.

Sales in Europe increased approximately 1% over 4Q01. Turning to Direct Alliance, it recorded a 2% decrease in net sales from a year ago, with net sales of 25.7 million dollars in 1Q02 compared to 26.1 million dollars in 1Q01. This decrease is due to the reduction of pass-through product sales. Pass-through product sales are with Direct Alliance as an accommodation to select service T-Base program clients, purchases and immediately resale products to the clients for immediate resale to the customers. These pass-through product sales are completed at will on no gross margin and are included in sales and cost of goods sold. Despite the challenging IT environment, Direct Alliance managed to keep its service fees based revenue fairly consistent with the prior year.

Now turning to gross profit, the company saw an increase in overall gross profit as a percentage of net sales

as it improved from 11.5% in 1Q01 and 12.2% in 4Q01 to 12.4% in 1Q02. Insight's gross profit as a percentage of net sales was 12% in 1Q02 as compared to 11.1% in 1Q01 and 11.6% last quarter. Direct Alliance's gross

profit as a percentage of sales was 21% in 1Q02 compared to 20.8% in 1Q01 and 23.7% last quarter.

We continue to drive the message of profitability in market share throughout the company and the results are beginning to show. The majority of the overall increase in gross profit percentage from prior year was due to increased product margins while a smaller portion was caused by the net revenue recognition of certain software assurance offering and services. These increases were offset by some reductions in supplier reimbursement.

Other components of cost of goods sold remains fairly consistent as a percentage of net sales. As reported in past conference calls and earnings releases, we expect gross profit percentage to fluctuate depending on factors such as industry-wide pricing pressures, supplier reimbursement programs, pricing selling strategies and product and outsourcing program mix. First quarter 2002 operating expenses, as a percentage of net sales increased from 7.2% in 1Q01 to 8.6% in 1Q02 but decreased from 9.2% in 4Q01. The increase from 1Q01 was due to the inclusion of operating expenses for acquired entities. Untill these entities convert entirely to the inside model,

gross profit percentage and operating expense percentage will be substantially higher than base Insight businesses.

However, the decrease from last quarter was due to cost savings initiatives including a reduction in staff during the last half of 2001. Although we have initiatives that have reduced operating expenses, we continue to invest in facility improvements in the United Kingdom and IT resources that focus on continuous improvement of our website, operational efficiencies, and transactional processes with customers and suppliers.

Looking at the balance sheet, we ended the quarter with 62 million in cash on hand compared to 44 million a year earlier.

Accounts receivable totalled 307 millioin dollars as compared to 305 million at March 31, 2001. Day sales outstanding in ending the accounts receivable were 52 days at March 31, 2002 compared to 49 at 1Q01 and 52 at 4Q01. The inventory levels were 33 million at March 31, 2002 compared to 17 million at March 31, 2001. Annualized inventory turns were 56 times in 1Q compared to 92 times in 1Q01. The increase in inventory and corresponding decrease in inventory turns is due to the acquisition of Action, which initiates very few drop shifts and an increase in opportunistic purchases. In 1Q02, 75% of Insight shipments to North American customers left from non Insight distribution facilities, up from 73% in 1Q01. In Europe, the direct ship percentage is down from 40% in 1Q01 to 35% in 1Q02 due to the acquisition of Action. The direct ship model not only provides exceptional service to our customers, it is consistent with our variable operating model and eliminates almost all risks of inventory obsolescence and price declines. However, we do not expect to see an increase in direct shipment as the percentage of the sales in the United States as we believe there is always a need to have some inventory, particularly when opportunistic

are presented.

This gives you a recap for the first quarter of 2002. However, this is just the start of the story. We cannot be more pleased or excited to announce the acquisition of Comark Inc effective today. I will turn the call back over to Tim, so he can express, only as Tim can, the positive attributes of this substantial acquisition.

Thanks Stan. As Stan just stated, we are extremely excited about the acquisition of Comark. Comark's success in the medium-to-large enterprise customer segment teamed with Insight's expertise in the small and mid-sized business customer solidifies our position as a major player in the industry. The combined enterprise is better equipped to respond to the changing market dynamics and well positioned to remain a leading provider of IT products and services to businesses across the globe. Another benefit of this acquisition is that the consolidated company's presence in the government area has been greatly increased with combined annual revenue of approximately 250 million. Our great success and the timely integration of our recent acquisition of Action in the UK and bringing it to 3% operating profit in 1Q02 from breakeven in 4Q01 gives us confidence in our ability to successfully integrate Comark. I have personally known Chuck and Phil the principles of Comark for over a decade and feel very comfortable with our similar cultures and their commitment to help successfully integrate our two great companies.

The union of Insight Enterprises and Comarks brings together two companies with proven track records of profitability and growth. The combination of our highly productive and efficient sales and marketing models, with Insight Enterprises's servicing the small-to-mid sized businesses and public sector segments and Comark servicing medium-to-large enterprises and public sector segments, creates an organization that can effectively and cost efficiently sell it to all business and public market sectors. The combination of Insight Enterprises's leading virtual inventory model and the associated breadth product offering with the depth and quality of service offered by Comark results in a dynamic organization that provide comprehensive and cost effective integrated production service solutions across all business and public sector customers. This consolidation of two major industry players provides Insight Enterprises the opportunity to solidify our position as a leading information technology provider, enhance our existing customer base through strategic and low care sales offices and access to large enterprise customers.

Capitalize on experienced direct sales force that is cost effective in the service, corporate, and public market sectors become the primary source for all information technology products and related services for small-to-mid sized business customers. Expand our vast product offerings into medium and large enterprise business, leverage our capabilities to deliver custom IT solutions including complex systems integration and total project management through all markets that we serve. Increase our penetration into the public sector, particularly the federal government. Increase our buying leverage with suppliers.

Realize cost savings through economies of scale and operational synergies, benefit from a combination of the best virtual and fiscal distribution capability in the industry and to add experience and depth to our senior management team. Comark had revenues of approximately 1.5 billion and earnings before income tax of approximately 41million for the fiscal year ended Dec 31, 2001. We acquired Comark of approximately 150 million, 100 million in cash and approximately 50 million in Insight Enterprises common stock. The book value of Comark as of close as on today is approximately 85.5 million. We expect the acquisition to be accrued to our earnings per share in fiscal 2002 and the call would'nt be complete without Stan adding, that we will be quick to point out this does not mean that earnings will necessarily go up for any future periods. That's said. I will ask Stan to provide the guidance for 2Q02. Stan...

Thanks Tim. We expect consolidated net sales for 2Q02 to be in the range of 720 million dollars to 760 million dollars and diluted earnings per share to be between 31 cents and 35 cents. This assumes some

from the combined entity due to net revenue recognition of certain service offerings at Comark, and a reduction in sales to certain resellers including historical sales between Insight and Comark. We are also anticipating no integration savings relating to the acquisition of Comark in Q202 and a blended gross profit percentage between 12% and 12.2%. Now, I'll turn the call back to Tim for final comments. Tim ...

Thanks Stan. As you can see, we had a very busy quarter successfully integrating Action, executing initiatives to enhance gross margin and purchase a dynamic organization that will propel Insight Enterprises to a position of being the undisputed major player in the industry. We wish to thank all of our employees worldwide for making Insight Enterprises a continued success. We would like to give a special thank you to the employees in United Kingdom, that's our dedicated integration team, for all their outstanding work in integrating action. Additionally, we would like to extend a huge welcome to all the valuable employees at Comark who are now part of the great Insight team. There is a lot of excitement about a

Insight right now and together we will set the stage for continued future success. That concludes my comments. Stan and I are now available to answer any questions that you may have.

At this time, I would like to remind everyone in order to ask a question please press star and then the number 1 on your teleophone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from David Manthey

of Robert W. Baird & Co.

Hi guys, good afternoon.

How are u doing?

Real good, how are you? Question for you on the German operations. I was wondering if you could help us understand what the impact of the closure of Germany had on your EBIT margin this quarter relative to, say, last quarter?

Dave, this is Stan. It really had a very, very minimal impact and that is basically because that operation, as you know and as we disclosed prior, was very, very small in the consolidated picture. So the impact is extremely minimal.

Okay. But you are writing operating losses there right, was that meaningful?

Yeah, not meaningful in the big picture.

Okay. As far as debt goes, are there any debt contracts that are up within the next 12 months, say, and maybe you could talk about the numbers you have today relative to, say, fourth quarter a year ago?

Yeah Dave this is Stan again. Again, as you know we really don't talk about specific contracts. So, I guess I'm not going to, you know, sit here and say what the situation is. However, I would like to say that, you know, when you look at Direct Alliance's performance, I mean, in this market, which they are really IT focused, they held their own despite the fact that competitors are losing ground. So, they are doing an excellent job over there and I think because of that situation, it is probably a fair assumption that you can make that probably everything is pretty status quo there, because they are holding their own so very well. So, outside of that, I really don't want to give any other comment on specific contracts that might be attributable to Direct Alliance at this time.

Okay. Then quickly on the Comark. When you look at that, their business relative to yours, what type of customer list overlap is there? You are talking about a meaningful 25% to 30% or is it smaller than that?

It's less than that. One of the key things is that, when we are, let us say, the 500 to 1000 seats customer we might be number 4,5,6, supplier or they might be number 1,2,3, supplier. So, if somebody counts, yeah, we will have some overlap, but I think it's going to be a business on a consolidated basis. We are not planning on really losing any material amount of business between the two companies.

Okay. And then could you talk about their product versus service mix and the margin characteristics of those?

Without getting into specifics on that, the vast majority of their business is product based, 90% plus. They have a small services business, although their services business is at least 12 months ahead of ours. So, we view that as an extreme positive on the consolidated companies, but on an ongoing basis they are still very much a product focused company.

Okay. But this is a direct sales force, right, they at least have feet on the street, people knocking on doors, right?

That is a combination, correct. Well, I think Comark has done a great job on determining when to knock on doors and when not to, when to use the phones and when to use a face-to-face sales force. And if you look at their -- when we were disclosing the

stuff, you will see that SG&A is extremely aggressive. So, they have got a great formula of how to do that. Obviously, making over $40m last year, these guyz have a formula that wins.

Alright, thanks. I'll get back in line, here.

Thank you.

Your next question comes from Brian Alexander of Raymond James.

Thanks. Good quarter. A little bit more on Comark. First of all, in the guidance for the June quarter revenues, can you say how much revenue you are assuming from Comark?

No, really not, pardon me, but here is some things that I think you can probably pass it together to give you a good feeling. As Tim said in his comments, the way that we view the US right now, is not that it is going down any further, but we certainly don't feel that is worsening, but we don't feel that it is necessarily getting any greater. So, consequently with that as kind of a backdrop and knowing that, you know, 80% of our revenues in Insight before Comark was really in the US or North America area, I think it is probably fair to assume that we did not assume very much growth in US, North American revenue. Along that same line, keep in mind, in Comark, they were acquiring that as of today, so essentially there is only 2 months of the 3 months of Comark's revenues in this quarter. So, I think with that little mosaic of information, if you would, hopefully you can answer your question.

I think I can do that. How does this affect Nexus? How many states are affected even if they do have a service present?

On a divisional basis, lets call the corporate division will have a Nexus for sales tax in most state on the small to mid-size business segment, they will continue to have Nexus in the states they have Nexus today. So, there will not be an overlap from a company wide perspective.

Okay. Looking at action, 3% operating margins for this quarter, how much more improvement do you see there and then my last question is on rebate, looks like there are a lot of your competitors as well as you have taken a step down this quarter. Do you think that is the trend if not what gives you comfort that rebates as a percentage of sales or where is that trend?

Okay, Brian, just stay on. I'll answer your first question and Tim will tackle the second. The first question on action, where we are going to go, we had originally, last quarter, told you that as a goal, it doesn't mean, you know, that certain -- concrete and everything, but as a goal, over in UK, we wanted them to be at 4- 4.5% operating profit in 4Q. So, that gives you kind of a guideline of where we are shooting for from a goal point of view now. We also told you, if you remember last quarter, that we said their goal was 3% operating in 1Q and they did accomplish that. So, hopefully with those two pieces of information you can then gleen on where you think they are going to be for the rest of the year. Now, Tim will answer on supplier reinvestment.

One more thing on

. We have actually formally completed the integration in the first couple of days of April. So, we have still got a few lingering effects from last quarter that will help them on an operating margin basis and going forward on the cost basis. On the rebate question, rebates went down slightly this quarter from 4Q 2001, part of that, obviously uses as suppliers we do their plans over time but if you see, we actually picked up some of that on the byside. So it was kind of an accommodation deal. We had some dollars moved from the back and the front. So, on a material basis, we really haven't changed our gorss margin projections based upon any changes that our suppliers are doing right now.

Thanks a lot.

Thank you.

Your next question comes from Bruce Simpson of William Blair and Co.

Hi! guys.

Hey, how are u doing?

Doing good. A couple of questions about Comark. First of all, could you clarify the answer earlier about Nexus? For example, if you have a state where Comark now has a service presence or a feet on the street sales presence and you sell goods in that state in your typical Insight catalogue and account management business, will you now have to charge sales tax where you didn't before or how is that going to work?

No, we don't. Basically, how you get around is through a corporate organizational structure but the answer is no, we do not.

The two corporations are brother and sister. So, one does not necessarily give you Nexus than the other.

I understand and can you just give us a little qualitative sense as how you envision these two pieces fitting together? I mean I can understand that in general it is a larger-size client base and they would bring in some public business, but are you going to combine or keep separate the sales forces, for example catalogues, are you going to put their service business under your

? Do you basically think about these things operating independently side by side or as an integrated whole in the future?

Let me answer in a long - a little bit more drawn out way. We spent the last many weeks not focused on the deal but focused on the integration, for exactly that reason. Most of our energy has been spent on getting the work charts, the operational plans, and we have taken knowledge that we have learnt through the last couple of acquisitions and how are we mechanically going to do this. So, let me tell you what it's going to like maybe on the other end. On the Insight side, there is four major operating divisions. One is SMB, classic phone-based. One will be, let's call it, corporate or that is meeting the large enterprise. The Comark guys are not after the Fortune-10 accounts.

They are really after that 1000 to 5000 range, in terms of large customers, on a midsize, 300 to 1000. So, when we are looking across a customer base, it is really not that much big than what it looks actually right now but the goal would be to put all like operations together. Then, we also have a services business out there, additionally have a government business out there. So, those are going to be operating independently of each other. The best way of doing this is in a couple of weeks, maybe a couple of months, we will actually publish a formal launch structure on how it is going operate. So, people can actually see it because it is difficult over the phone to lay it out. But the goal is to integrate operations, especially on the back-end. On the front-end, again, we feel as if there is just not that much overlap. We are going to integrate what the customers are saying but when the customers are different, we are definitely going to keep it separate.

Okay. Integrate where customer is same or where customer is different, keep them apart.

Correct.

So, that's really what determines whether they are going to be brought together?

Correct, in terms of only the front-end.

Now, how would you describe the reasons behind Comark's desire to sell to you and how long has this been, sort of in the work, if you can share that without, you know, revealing anything too proprietary?

Well, I've been talking with

about this for 7 years.

It's kind of a joke but it is not real. We have talked about this for a long time. I think everybody knew that the successful major players were going to consolidate at some point. There were really in a situation where getting public as an independent entity was very difficult. As the industry continues to mature, it makes sense, especially given our like cultures and the fact that with a slightly different customer base, too good together, especially with common back-ends that are very, very similar. They have a couple of things that we are very excited about. One, I can say, is the services business, they are way ahead of us in that area. But number two is they have integration, but advanced integration on that, which I think is critical for us. But when you wrap it all up, I think

started this business 25 years ago. We all kind of

in this industry for many, many years and so I've known them on a personal basis, their personalities and our personalities are very, very similar, the functions and the businesses are the same and that is what gives me a lot of comfort, that we have got a great shot at a spectacular intergration.

Will you tell us how many sales people they have then, you know, basically how much of field sales force is inside?

Not at this time. As we go a little bit further, we are going to lay

all at once so that everybody gets a feel for it.

Okay and then I can if I can shift and just take one more here on the core business and following up the earlier question about rebates. Other than just sort of saying that you know perhaps they were a little bit less generous from the 4Q to 1Q, will you be any more specific about quantifying that or talking about which particular, either manufacturers or product lines are impacted and not impacted and in particular, it seems like Compaq has got into a lot of press. It has been a little bit aggressive about restructuring theirs. Was that a significant source of change for you guyz in this quarter? Thanks.

If you look at it on a gross margin basis, which is where most of our back-end show up, when you look at it, you know, obviously gross margin went up sequentially. So, we really didn't see a huge impact. My biggest question go forward is what HP and Compaq are going to do. Not necessarily, you know, cutting it back, but just the changes. We know there is going to be a change out of those guys when they are together. We are just not 100% sure what it is going to look like and what the program is going to be. So, we have finally got a way to see for that. That is one of the biggest areas that I am concerned about. Obviously, giving us now that we are basically twice the size in the US. That gives me a lot more comfort that working with not only a major customer but with a major force out there, so that feeling as I would say two months ago is much less today than it was. Part of it is we just don't know. We just don't know what the new programs are going to be, what are the consolidated entity steps to operate.

And Tim, of all of the impact from these vendor rebates, how much of that comes from just those two companies? Is that virtually all of it or smaller vendors also following suit?

One of the things is that, you know, we have 1000 manufacturers that we represent. Obviously, it is based upon sell-through, usually as a percentage, but there is constantly people changing programs. As an example, without mentioning specific name, there is a large peripheral supplier that shifted from back-end dollars to front-end dollars. They were giving us 12 points, now they are give us 14 points, but it is

way of couple of points to the back-end. Net debts were in the same position. So, there is always a

going on. There is no doubt on a consolidated basis that HP and Compaq are major suppliers to us. So, that is where my hesitation is as I just don't what the new programs are going to look like from these guys.

Thank you.

Thank you.

Your next question comes from John Lawrence of Morgan Keegan.

Hi! guys.

How are you doing?

Could you comment a little bit, Tim on the fact that now that you have got the UK sort of profitable and all that, how fast will you grow that business now, I mean, depending on how fast you go with Comark, can you talk about that?

We are definitely going to be very aggressive in the UK in terms of revenue strength. Obviously, it is certainly the former sales people. If you look back, to a couple of conference calls ago, we talked about action specifically. They had a huge customer base that was primarily catalogue with no sales force servicing that. So, we are running a process -- midway to that process of assigning account executives and hiring and training them enough to make sure that we have got full representation across the entire customer base of account executives. So again, that would probably take us three, six, nine months, we are not getting into a massive rate. Right now, we are adding roughly 25 a month from basically April 1 through the end of the year, that is our current plan in the UK. But again that can change based on economic conditions, etc.

Yeah. On Comark, can you go one step further on the back-end, I mean, systems compatibility and I assume part of that is establishing a

model?

Of course, we think that's one of our skills.

, they really have a world class integration set up and also distribution warehouse facility. So, that together with our warehouse facility and our

capability, I think, gives us the best of both worlds. So, we can take part

that would make sense. And again at this size, it may be excess taking more product

as opposed to less products. But on some of the slower movers we can definitely shift their models to the dropshift for those particular units.

Right, thank you.

Thank you.

Your next question comes from Sterling

of Morgan Stanley. Sterling, your line is open.

Thanks very much. On the Comark acquisition, how will that change particularly in North America your virtual model, where your distributor and some vendor partners ship directly to your end users? What sort of facility, warehouse facility or distribution facility, do you get with the Comark acquisition?

Combined here in Chicago, which is where we are right now. We get the combined size of the advanced integration of warehouse distribution facilities of almost 300,000 square feet. That's on top of our facility in Indianapolis at 180,000 square feet. So, we have got a lot of capacity there. Let me talk about an aggregate, because again this is not going to be an overnight integration, we are focused on maintaining the relationships, the people of Comark, maintaining the operations and sales and profitability that will allow doing this. Again, Comark is a very profitable and well-run company. We don't need to change overnight anything. So, we are going to take our time on integration.

So, a lot of the integration may take six, seven, eight months to finish. That's okay, we do not want to be impactful at all to the customer specifically. Let's start, this is early 2003, I would guess across the board we would be

less as a combined entity and stocking more products just in aggregate. Because of our combined size, it may make sense to stock some more product just because we have now got more revenues

, some product lines that we may have not considered important to us from the stocking prospective. Now they might be. So in aggregate, you can see us

less as a whole as percentages, in absolute dollars obviously, we would be

a lot more.

Okay. Thank you. My second question, with respect to software, there was great growth in software in 2001 from several different factors. Looking out into the rest of 2002, particularly I guess July, when the Microsoft program ends, how do you see software growth or revenue going forward?

In an aggregate, I think, you are going to see software level to slightly up for the rest of the year, but part of the game is that, especially some of these licenses, such as Microsoft and others, switch from revenue based to more of service-based item. You will just get the gross profit, same dollars, just accounted for differently. It may look different on the top line but the bottom line, I don't think it is going to be a material change to us.

Great. Thank you very much.

Thank you.

Your next question comes from Mat Sheerin of Thomas Weisel Partners.

Yes, good afternoon. Regarding Comark again, could you tell me again what percentage of the revenue was government related?

Their percentage -- this is government education. As an example, basically public sector 150 million in 12 months.

Okay and then you said that combined with your existing, sales for that sector would be 250 million, is that correct?

It is correct.

Okay and if you could -- you told us that Comark's revenue last year was 1.5 billion. Could you give us an idea, sir, what the revenue trends are, you know, particularly in that we are seeing that the resellers have felt large corporations have either seen revenue throughout at a larger rate than you are showing to the S&B market and loss of market share to the direct vendors, if you could give us an idea of perhaps 1.5 billion last year, what does the run rate look like now?

Let me answer to that even more -- in fact looking at it historical little more. 2000 as a year had approximately the same revenue. So, even in a declining IT-spend market, these guys were able to hold shares and make excellent profit in 2001. We see no material change in our business for the first four months of this year. So, in what we would all call a top environment, especially with that mid-to-large larger customers, they have held the road and really gained significant share to that period. So, that's one of the reasons that gives us tremendous excitement.

That's great. Indeed they also see sort of flattish revenue quarter to quarter, in the 1Q it was down a little bit because of their customer focus?

Very flattish.

Flattish, okay. And then also, given that the

larger enterprises, could you give us an idea of their product mix and just take you sort of upstream in terms of some higher end or mid range servers in storage areas?

You have touched on one of the most important areas for us. One of the problems that we have is above 500 seats. There is lots of production; we still feel we don't have access to some of the high-end IBM service etc. So, this is something that we are going to immediately get access to, not just because of the

except that now we have the capability to not only sell but also integrate them in custom warehouse units. Definitely that would be a tremendous opportunity for the Insight side of the business and the S&B focus. So, product operatization basis is huge for us.

And Matthew, 'cos Tim won't let me talk

-- in terms of the product mix, it is very similar - they have a little bit higher percentage of PCs because of the customer base they sell to, but the rest of the mix is pretty similar to ours. So, not a lot of difference between us, again goes back to this whole thing that two companies, the culture, the products everything seems to mix together very, very well.

One of the things also in the product mix is that they carry around 30,000 SKUs right now. We are already well over 180,000, almost 200,000. This is where we hope to add some of our

capability and the fact that they haven't been offering

the lower volume stock, now they can to the Comark customer base. So, the product mixes may actually come closer together over the next three, four, five quarters.

Great. So, Tim, everything sounds great here, but what is the one, sort of, concern that you might have regarding the acquisition?

These are two big companies. You can never underestimate an integration.

Okay, great. Thanks very much.

Thank you.

Your next question comes from Brett Milller of AG Edwards.

Hi! everybody. You are all going to be headquartered in Phoenix. Does this mean like Karen and Stanley are going to have to move to Chicago?

Stay on line, we can have this discussion later.

I don't think Stan has got a coat. Hey, congratulations on a really good quarter. You guys actually did well on plan. I just wanted if you could just give at least the top management break out here as a combined entity?

It really was a rough structure. It will be obviously myself, Stan, Eric, still chairman from that persepective, Tony Smith remains president and the major operating divisions,

will continue to run Insight out of Phoenix and in North America. Joe Borway and Michael Wise will run the services business together and Tim McGrath will run the corporate business.

Michael Wise and Tim McGrath are from Comark and the other people from Insight?

That's correct.

On the services business, could you kind of break out what the combined services business will look like at all? You broke up government education, if you could break out what the service business would look like?

We are not doing it right now. We will show you probably in next call, we will give you a detailed listing because how we account for things is a little bit different with how they account. So we will give it apples-to-apples comparison, especially in terms of how we recognize revenue.

Fair enough. Does Comark have a physical DC location for the government education business?

Obviously in Chicago. Has physical facilities in Washington DC but the physical distribution is in Chicago.

But they do have a physical government education?

They have a GSA contract, which Insight does not.

Right, okay. That's a key area. Thirdly, if you could touch a little bit on going back to the normal business, ASPs and units on the desktop and notebook and Tim, I think you mentioned before that there is to be some new suppliers that might pluck our eyebrows here, anything on that?

few press releases here and there but I think that the Comark transaction definitely accelerates that especially the new supplier firm. So, look for some exciting step coming out down the road.

And lastly, if you could touch us a little bit. Stanley, If we had to go back into Insight direct North America, would it become like baseline for gross margins here versus software assurance some of the net income, revenue related businesses basically software show from Microsoft?

Basically what we had talked about from Insight point of view, if you recall in the script was that Insight was operating pretty much in 12 percent range, if I remember our gross margin as we told you in prior conference calls, the UK was at a higher gross profit margin, a couple of points which has remained pretty much the same at this quarter. So I think if you take those two factors into account and knowing that 80 percent of the business are in the US you can probably come up with the number that you want.

Ok. I just want to consult going forward, since the net revenue basis, we are not going to see the impact on the top line if that slows, but will definitely feel it on the gross margin line if software

net margin business goes away. How shall we look those from a longer term gross margins throughout the year? You usually talk about declining a few basis points at quarter. Is that still your guidance?

How we kind of operate the business trend is along that line and we kind of go in there and say, hey every quarter kind of plan about the 10th a percent decline each quarter and we continue to run the business that way. The good news is, as Tim pointed out, with this increased focus on profitability which is the opposite in this case. I guess what I am saying is that we gave you some guidance in terms of where we thought for the quarter Comark would be I think in terms of Insight, you should probably continue from a conservative point of view to take the attitude that may go down at 10th of a percent or so for the quarter, but the good news is that we have beaten that every time for the last couple of quarters so maybe was some pleasant surprises there at the end of this quarter.

Oh. Great execution with a lot of distraction at a bad market. So good job guys. Thanks.

Thanks.

Your next question is a follow up from David Manthey of Robert W. Baird & Co.

Hey guys. Wondering if this transaction was just privately negotiated? Was there any other interesting bidders on this?

It's privately negotiated. As I said we have been dancing for seven years.

The music suddenly stopped.

All right. And the thinking about Comark from an EBITD margin standpoint, I am trying to understand, do they have any debt on their books right now?

They have no debt. What we did do though in terms of the transaction is we did borrow some money in order to fund the transaction. You will see some debt from that but the books that we got from them had no debt on it at all.

Ok. Tim, you talked about the sales that they saw in previous years, but what about their assuming this pre-tax margin is similar to what they are seeing on the EBIT line? How is that trended historically, is there any window dressing going on here?

Actually we had good 2001, little bit the same way. I think that probably shouldn't be material change in that. But biggest hesitation on projections is that we are going to have significant integration cost in this thing. So, again until we get the thing integrated we are not going to be able to realize all the synergies in cost savings and everything else. In fact we are going to have extra cost in this interim period.

Ok. It's a good segway to my next question. When you look at the 31 to 35 cent guidance, how much of that is Comark versus the core business? I am trying to understand, if not for this acquisition would you have been talking about EPS higher than what we were previously looking at or we are looking at something flattish or within expectations?

I guess the question is what were you previously looking at, David. So that would be my first one. I think if you look historically in Q1, I think all the analysts had it in the 23 to 24 cent range and in the course we came at 28, which was a pleasant surprise hopefully. In Q2, what we have indicated earlier is that we really expected the US, which is 80 percent of the business, you know, not to be necessarily or definitely not down, but not necessarily pointing upwards. So I think with those things in mind hopefully that gives you a kind of an idea again from a mosaic point of view where we kind of expected Insight to be and the difference is what we expect from Comark.

However, when I would encourage you to take into account when you figure in Comark is, that's what Tim just said is first of all again being on the conservative side and being concerned that there will be cost in the short run because we don't need to hurry up to get this acquisition integrated because they are a very fine company as they are right now. You need to allow for that and as I told you before, particularly in connection with the action transaction, is I don't think it's unfair to think that there could be some lost revenues when you are doing your projections out there. Now do you want any better expected no, but I think that is something certainly that we took into account when we gave you the account guidance of the numbers.

Ok. And last question is on the IT systems. After you have seen what Comark has, are you going to transfer you Max

to Comark or do they have something that is equivalent or better? How do you plan on handling that?

We are doing the formal analysis right now, we will have the answer on that in less than 30 days.

Your next question is from Greg

of Sickle Asset

.

Thanks. Good afternoon, guys. Could you tell us what the lock up is on the shares that are going to be issued through check and fill?

The lock up, Greg this is Stan.

You have called me at a bad time. You know actually I just can't remember right now what that is.

Bu there is something.

There is a lock up though, definitely a lock up and I just can't remember, I have been working.

That will do for now. Let me go on to the next question. What will their role be in the new Insight Enterprises company?

. There has been basically had their basic advice

to me in terms of strategic and the operational role definitely going to be

in terms of actually helping integrate the companies. But when we come up the other side they will not have a direct operating role in day-to-day.

Ok. Next question. You are paying a 100 million cash on top of the stock being issued. What is the source of that cash, are you borrowing a 100 million and could you tell us the terms of that?

No. We are not borrowing a 100 million, we did borrow 50 million. We had a pretty hefty cash build up and so we used the rest of that from cash in the pockets that we had.

Yeah. But the balance sheet shows 62 million plus 50 gets you to 112, that will leave you just 12 million?

Well, just remember that the balance sheet is as of March 31, that changes constantly obviously. We do have a 100 million dollar line of credit as you saw in the financial statements from our lender and then Comark

lender that was substantial and the labor was a 100 million and we did borrow 50 million in the total deal.

Ok. But they did not have any debt?

They had no debt.

Other than this 50.

Right.

Could you describe, could you calculate for us the dollar value of what you would proceed to be redundant cost in the organization between the two companies?

Greg again, knowing us, we don't want to say as what we actually did in there and go through it and I think we will have a pretty good feel, and I think you have a very good feel on the next conference call. Again I guess I want to stress the fact that you know, you look at your financials and it is not like it is broke, it is a very good company and so what we need to do is take our time and we have got some of lot of

but we just haven't finalized the stuff. And you know just getting to this point was a heck of a lot of effort in this quarter and so we still got our work ahead and one of them is to figure out exactly what you are saying and in the next call, I think we will be able to give you some help in that area. But right now I think it is supreme mature.

I know you have talked about this stuff already in the call. Maybe I am little bit slow as a listener. I didn't quite get the actual....How much of their business is being direct shipped without running through the inventory, the way you do it?

Very, very, very little. That means small.

Ok and you expect to convert a lot of their business to their business to your directship model?

Again, look at the customer base, their customer base is a medium to enterprise customer. That requires a different sorted distribution system to the customers, but as Tim pointed out earlier the real need think that we add with the virtual model is where they only 30,000 SKUs now, we can now offer through their customers a 150,000 other SKUs that hopefully what help in sales to those customers. So I think the answer to it is that it's a combination of the two, of the great distribution integration facility that they have, and the virtual model that we have and as a result hopefully we can penetrate deeper into their customer base as a result of that.

I see. So, do you expect hopefully to be able to cross sell.

Absolutely. Absolutely.

I get it. Well thanks a lot and congratulations on the move.

Your next question is a follow up from Brian Alexander of Raymond James & Associates Inc.

It's been a long call, I will follow up offline.

Thank you.

Your next question comes from Bruce Simpson from William Blair & Company.

Hi guys. First of all, Stan, despite what you have heard Chicago was lovely in the winter you are going to love it.

Thanks Bruce.

Couple of questions on Comark here. What percentage of their business is from international? Is that a sizeable operation there?

No. Very, very small. Virtually nothing.

Ok. And then, who would you say are their primary competitors?

They have a combination. The public can hit from a couple of different ways. They did

experienced guys like Insight, CDW, but there really have a chance that has a dominant impact. But the most part is the regional bars

.

Ok. So, nobody still outstanding that kind of caters to that market that they are in

?

No. Not of an equivalent size.

Ok. And then turning to core business, it got lost to little bit in all moving pieces. One thing is that share count rose considerably with

through is that from action or what are the take up of millions of shares?

Again some option exercises along the way and I think it was primarily from that. The

using that actually happened. It's an option exercise.

Ok. Can you talk a little bit about the operative, can you sort of script out what the operating margin trend was in your core North American business? I know it's totally integrated with action at this point. But obviously a lot of the leverage you got was from cutting expense in the UK, if you hadn't had that impact of bringing their business sequentially started from zero percent to three percent. What will profitability trans like in your core North America business?

The operating expenses as a percentage decline, we took out between July and December approximately a little over 500 plus account executives and you know again the salaries there if you take that into account you noticed that the operating expenses are dropping as a result of that. We additionally took out to introduce them for some nonsales account areas. So, as a result of that the operating expenses in North America were down from Q4, which is the right trend and I think hopefully do some other initiatives we will see that trend continue.

Ok. So would you say that the changes that you made to your North American sales force are pretty much fully reflected in this first quarter or have we not yet seen because of the timing or magnitude of it?

No. They will reflect. From the account force because that was really done between the period of July and December 31. So you have really seen that reduction reflected in Q1.

Ok. Last thing and I will get off. Any data that should give us some outcome of the operating statistics within the core business such as a number of customers growing, the number of invoices growing, shrinking staying the same? Thanks.

Ok. Thanks Bruce. We haven't given customer information out. One thing that you know I might put out here for you to think about is certainly in terms of number of orders. They increased dramatically from Q4, which I think is a very good sign. You saw that our average order size overall went down, but the number of orders went to my mind went up almost 20 percent. So I mean it was a significant job during that period of time, which I think is a good sign. In terms of customer count, we just haven't done it because again the problem of defining customers out there. I don't want to throw a number out. The people start trying to compare apples-to-apples when it is different basis.

Ok. Thanks a lot and good luck with all the integration.

Thank you.

Your next question is also a follow up from Brett Miller of AG Edwards & Sons.

Sure. A quick one and we will go home. Comark, did they have material systems integration, custom integration capabilities and does this satisfy your acquisitions in terms of education and where are you doing up there?

Just above. How was that. I will give you a longer answer.

No it's ok.

They have a sophisticated integration

almost 2500 systems per day including technology integration. On the government side, the government gives us significant scale in that area of physical presence and the geography of the East Coast. So we are very excited about that also.

significant platform to go from.

Now with that I would like to thank everyone on behalf of Insight Enterprises for your support. If any of you have not had an opportunity to experience Insight or now Comark, we advice you to consider us. We are making a next product or services purchase. With that, thank you very much for attending our conference call. Good bye.