Insight Enterprises Inc (NSIT) 2002 Q2 法說會逐字稿

Good afternoon, my name is Tuwana and I'll be your conference facilitator today.

At this time I'd like to welcome everyone to the Insight Enterprises Q2 2002 Quarterly Earnings Conference Call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press "*" then the "1" on your telephone keypad.

If you would like to withdraw your question, press the "#" key, thank you.

Mr. Laybourne, you may begin your conference.

Thank you, welcome everyone and thank you for joining the Insight Enterprises conference call.

Today we'll be discussing the company's earnings results for the quarter ended June 30th 2002.

Joining me, Stanley Laybourne, Chief Financial Officer, is Tim Crown [indiscernible] of Insight Enterprises, Inc.

If you have not received the earnings release that was emailed or faxed to you within the past hour, you will find it on our website at "insight.com" under 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'll only be concentrating on highlights of the quarter during the scripted portion of the conference call.

As usual at the conclusion of the descriptive portion, we'll answer any question that our listeners may have.

Today's call including all questions and answers is again being webcast live on our website under company info -- investor relations -- conference calls.

An archived index copy of the conference call will be available on the investor relations section of our website approximately two hours after completion of the call and will remain for approximately two weeks.

This conference call and the associated webcast contain time sensitive information that is accurate only as of today, July 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 in 10-K contains discussions, relating to risk and forward-looking information.

Any forward looking-statements that are made in this conference call are subject to risk and uncertainties that could cause the actual results to differ interiorly.

Now with all that being said, Tim will begin by providing you with an overview of our second quarter results -- Tim.

Thank you Stan.

Hello everyone and thank you for joining us.

Last week, we issued a press release and held a conference call informing the market that we anticipated our second quarter 2002 results to be lower than our original guidance.

At that time, we indicated that we expected our net sales to be 737 million and our diluted earnings per share to be between 26 and 29 cents.

Our consolidated net sales and net earnings for Q2 2002 were 737 million, and a strong 28 cents respectively.

This compared to our original guidance provided on April 25th 2002 of net sales between 720 million and 760 million and diluted earnings per share between 31 and 35 cents respectively.

As you can see our net sales were within the range of our original guidance, but our diluted earnings per share fell short of the low end of the range by 3 cents, or10 percent and our net earnings fell short of the range by only 4 percent.

As stated in our press release on July 17th and further clarified on our conference call held on July 18th, the discipline in Q202 results are due so to the operating results experienced by Insight's United Kingdom operations.

We experienced a 21 percent decline in Q2 2002 net sales from Q102 without a corresponding decrease in operating expenses.

This resulted in an operating loss of approximately 1 percent in Q2 compared to an operating profit of 3 percent in Q1.

Since acquiring Action in October 2001, net sales in the UK have been 112 million in Q4, 113 million in Q1, and then declined to 89 million in Q2.

The decline net sales was due to five main issues, as follows: sluggish demand in large enterprise sector, the seasonality affected the government business, the completion of IT wards for two major customers, a decline in web sales due to web conversion issues, and initial IS system learning curve challenges and lack of proper execution after the integration was completed.

We've an issued actions rolled to you above there on items.

And although we remain cautious, we do not expect to see continued material sales decline in UK during Q3 and Q4.

As seen last week, both the president and chief operating officer of Insight's United Kingdom operations have resigned at our request.

These resignations were the result of lack of execution after the integration, which included the inability to provide accurate weekly forecast, which we referred to his latest estimates, during the quarter.

However, the operating model in the UK does work as was evidenced by Q102.

Although net sales in UK were flat, Q401 to Q102, the full savings from redundancy costs cuts after the acquisitions were realized in Q102 resulting in the operating earnings of 3 percent.

When demand and gross profit soften in Q202 and it was evident that the net sales number from Q401 and Q102 would not be sustained in Q202, operating expenses should have been further reduced to preserve operating profit.

This simply was not done.

We've taken some criticism over the past week for relying on the latest estimates presented by UK management during the quarter and for not knowing sooner that these forecasts were no longer obtainable.

Our process of consolidating and discussing latest estimates with each business unit on a weakly basis is a great tool for running the business and for monitoring our expected quarterly performance compared to original guidance provided to the market.

However, we must place reliance in the senior management of each of these operating units to know better than anyone else how the business unit is performing to know the economic environment and the geography we operate in and to accurately judge the business plans and prospects for the rest of the quarter.

Our financial process itself is not broken.

What we have learnt, however, is that for newly acquired companies adjusting to this process is not automatic and accurate -- forecasting [accrues] with experience.

Going forward, we'll more closely scrutinize the latest estimates for newly acquired entities.

We'll provide management with more guidance and assistance to a new process, and we'll help them to be more fully understanding of the risks inherit to the latest estimate that could result in actual results being lower.

In the business units that have larger enterprise customers such as Action and Comark, a decrease or increase in IT spending by handful of customers has more significant impact on net sales that Insight has historically encountered in its small to mid-size business customers.

This in itself represents forecasting challenges, and we adjust our processes accordingly as the company grows.

While we search for a new person to run United Kingdom operations, we currently have experienced senior management from Insight's US operations managing the business until a permanent replacement is found.

In addition, as we stated in our last week's conference call both Eric Crown, Founder and Chairman, and I plan on spending considerable time on the United Kingdom to help execute a plan under UK operations back to profitability.

A senior management team is already on the ground UK completing business analysis and we'll begin the process of implementing a corrective action plan just as soon as the business analysis is totally complete.

In the meantime, however, we've taken the following actions assuming the net sales volume experienced in Q302 will be similar exactly to Q2.

We've placed an interim managing director in the UK while an executive search is completed.

We are reviewing the existing organizational structure including ratios of non-sales to sales employees.

We are reviewing compensation programs.

We've initiated contract with key customer and suppliers.

We've tightened expense control.

We've implemented to revise purchasing control system including lower dollar in some purchasing authority.

We've revised the Q3 budget to reflect flat sales and plant cost savings, and we've issued various incentives to increase sale and gross profit such as improving tax rates and increase in leasing volume.

Another issue that I'd like to address is the unwarranted concern over our reported Q102 results.

The operating loss of Insight's operations in UK in Q202 stemmed from a decline net sales and gross profit during the quarter.

We've absolutely no reason to believe that numbers reported in Q101 are misstated, and we're assuming that to reference this possibility is due to the public [indiscernible] surrounding other public companies having accounting issues.

However, we believe that there is any issue with Q102 results additionally.

Again net sales in the UK from Q102 were flat in Q401, the operating earnings at 3 percent resulted from the full savings from redundancy cost initiating Q4.

I hope that provides a clear understanding in what happened in Insight's UK operations during Q2 and our initial plans to correct the issue during the rest of the year.

Now I'd like to discuss our recent acquisition, Comark.

As we've stated and continue to state, we are extremely excited about the acquisition of Comark.

Although the integration is still in its beginning stages, we remain enthusiastic and confident in the success of this acquisition.

Unlike action, which had to be integrated immediately to achieve operating profitability, Comark is a very well established company with a long history of profitability.

We are currently looking at best practices within the two organizations, implementing changes how decisions are made, and evaluating the functionality of the two IT systems in every department.

We have received very favorable reactions from everyone affected by the acquisition, including employee, suppliers and customers.

Comark contributed approximately 235 million in net sales for the quarter.

Although very few synergies were realized in this quarter, Comark was accretive to our diluted earnings per share.

Remember, Comark's operations are included in the company's consolidated operations for only two months of the quarter.

Here is an update on the integration process.

The majority of the savings associated with integrating Insight and Comark operational efficiencies will be realized when one IS platform is implemented company wide.

We are continuing to form a comprehensive business requirement analysis and within four to six weeks after the completion of this analysis, we will move towards unifying the IS platform.

We anticipate that the coming platform will be fully implemented within 12 to 16 months from now.

All of the American departmental activities including legal services, financial services, financial accounting, IS, IT, marketing and HR have been consolidated under one worldwide organizational structure and redundancies are being eliminated.

Sales personnel have been reorganized in line with their appropriate enterprise market, SMB, and public sector segments respectively.

With regards to distribution, ER linkages have been completed to allow shared access across Comark's and Insight's inventory capabilities.

The return management process for the US operation of Insight has also been consolidated to the Chicago distribution center facility.

Product and supply management functions have also been consolidated, and specific manufacturing relationships and purchasing activities are being coordinated to maximize the benefits of enhanced purchasing power from the combined entities.

We have made this decision to consolidate both organizations' technical integration and configuration capabilities and transfer these responsibilities to our Chicago based operations, and this is anticipated to occur during the month of August.

Services have also been consolidated under the name, Insight Services Corporation.

Service offerings and market segment support responsibilities have been finalized.

Technical resource application has been finalized and is currently being implemented.

Technical support is being implemented across all customer segments and sales organizations.

Customer credit line availability is being shared among all North American operations.

Cleared approval authority for large credits has been centralized.

In the future, we plan to unify the Insight and Comark name, so there's only one brand.

And finally, the budget and latest estimate process is consistent with other Insight entities.

We had accomplished a great deal in the integration process since the acquisition of Comark in April 2002.

And although we envision full integration rolling out over an extended period of time, we are making excellent progress on maximizing our opportunities for immediate and sustained growth as one unified North American entity.

Our primarily goal has been and will continue to be to ensure little or no revenue disruption during this transition.

Now, I'll like to discuss the overall results for each of the operating segments.

Insight Direct Worldwide, which includes the newly acquired Comark Corporation and Direct Alliance Corporation.

Insight's overall net sales during the second quarter of 2002 was 713 million, up 48 percent from 481 million from the second quarter of 2001.

Net earnings for Insight were up 13 percent over prior year from 99.4 million to 10.6 million.

As of June 30th 2002, Insight had 2,241 account executives; of which, 1,971 are serving North America, and 270 are serving the UK.

This is up from 1,477 account executives at the end of Q102; of which, 1,197 were serving North America, and 280 were serving the UK.

The average tenure of an Insight account executive as of June 30th 2002 is now 2.3 years compared to 1.3 years at June 30th 2001.

Additionally, only 58 percent of our sales executives have less than 2 years experience; 16 percent have two to three years experience; and 26 percent of our sales executives have an excess of three years experience.

This is compared to 78, 8 and 14 percent respectively a year ago.

As a result of the above noted adjustments, we saw an impressive 68 percent productivity improvement in our account executives as compared to a year ago.

While the majority is due to the addition of Comark account executives servicing larger customers, Insight account executive productivity excluding Comark improved 19 percent.

We continue to be encouraged by these metrics as we know that the sales productivity increases dramatically with experience; and we see there are initiatives to increase retention or paying off.

Additionally with Comark, we acquired an established workforce of experienced account executives.

Our goal is to continue to drive up retention rates of our top performers throughout the company.

Gross profit as a percentage of sales in Insight increased to 11.5 percent, up from 11 percent in Q201.

The decrease from 12 percent in Q102 is due to a decrease in product margins due primarily to lower gross margins in the enterprise customers contributed by Comark.

Additionally, in Q202, the net revenue reported of certain software products resulted in an increasing gross profit percentage of 0.45 percent compared to an increase of 0.22 percent in Q102.

Now, let's move to product mix and average order size.

Product mix is fairly consistent with prior year as businesses apply wait-and-see approach to portions of their IT spending.

We continue to believe customers are lengthening their replaces due to the uncertainty of the general economy.

Software continued to be strong at 16 percent of net sales.

And although Microsoft's upgrade deadline ends July 31, we expect software to continue to be a strong product category in the foreseeable future.

Some of the strength will be more evident in gross margin than revenue as sales of software assurance products and Microsoft enterprise licenses, which we recorded as net revenue continue to grow.

Average order size in North America increased due to the addition of Comark.

The decrease in average order size in the UK was due to primarily the decrease in sales to a large enterprise sector.

During Q202, unassisted web sales account for 9.5 percent of sales compared to 11.3 percent in the prior year.

This decrease is due to the addition of Comark, which currently does not have any truly unassisted web sales.

Excluding Comark, unassisted web sales have increased over prior periods.

The company's outsourcing subsidiary, Direct Alliance Corporation, continues to be a strong contributor to the success of Insight Enterprises Inc.

Direct Alliance contributed 2.5 million in net earnings for the quarter, consistent with the first quarter of 2001.

I'll now turn the call back to Stan Laybourne for some comments about our financials and various operative statistics.

Stan.

Thanks Tim.

As we have stated before, Insight Enterprises Inc. is a holding company with two operating segments: the direct marketing segment consisting of Insight Direct Worldwide, which includes the operations of Comark and Direct Alliance Corporation, which is a business process outsourcing organization.

Although, net sales information may be provided by geography, customer market or product mix to explain fluctuations in market trends, detailed financial information, including gross margins and operating profits will only be provided at the operating level -- at operating segment level.

Overall net sales increased 46 percent compared to second quarter of 2001.

Without acquisitions, our net sales decreased over prior year.

Sales with Insight, our direct marketing operation, increased 48 percent over the second quarter of 2001; while Direct Alliance, our outsourcing operations increased 3 percent from the second quarter of 2001.

Insight accounted for about 97 percent of sales in the first quarter with sales from Direct Alliance representing the remaining 3.

Now, let's look specifically at Insight.

Insight's North American sales increased 39 percent in the second quarter 2002 compared to the second quarter of 2001 due to the acquisitions of Cortex in Canada during Q4 2001 and Comark in the United States during Q2 2002.

The net sales contributed by these acquisitions in Q2 2002 is offset partially by decreases and net sales resulting from a continuing sluggish economy, decreases in average selling prices, and sales of certain software product offerings in Q2 2002 recorded as net revenue.

Turning to Direct Alliance, it recorded a 3 percent increase in net sales from a year ago with net sales of 23.8 million in the second quarter compared to 23.2 million in the second quarter of 2001.

Service fees, which represent 90 percent of Direct Alliances, net sales grew 5 percent over prior year, while the pass-through products sales, which generated little or no gross margin declined 12 percent.

Despite the challenging IT environment, Direct Alliance continues to be positively contribute to the overall results of the Insight Enterprises, Inc.

Now turning to gross profits, the company saw an increase in overall gross profit as the percentage of net sales, as it improved from the 11.6 percent in the second quarter of 2001 to 11.8 percent in Q2 2002.

Insight's gross profit, as a percent of net sales was 11.5 percent in Q2 2002 as compared to 11 percent in Q2 2001.

Direct Alliances' gross profit as a percentage of sales was 21 percent in Q2 2002 compared to 24 percent in Q2 2001.

The overall increase in gross profit percentage from prior year was due to increased product margins and net revenue recognition of certain software assurance offerings.

These increases were offset by some reductions in supply reimbursements and lower gross margins in the enterprise customers contributed by Comark.

Other components of cost to goods sold remained fairly consistent as a percentage of net sales.

As reported in past conference calls and earning releases, we expect gross profit percentage to fluctuate depending on factors such as industry-wide pricing pressures, supplier reimbursement programs, pricing and selling strategies and customers product and outsourcing program mix.

Second quarter 2002 operating expenses, as a percentage of net sales, increased from 7.7 percent excluding a $1.4 million charge for the effect of aborted IPO cost related to Direct Alliance Corporation in Q2 2001 to 8.7 percent in Q2.

The increase from Q2 2001 was due to the inclusion of operating expenses for acquired and newly developed entities.

Additionally, the United Kingdom had a higher operating expense percentage than normal, as the operating expenses were not reduced to reflect the decline in the net sales during Q2 2002.

Comark's operating expenses, as a percentage of net sales, were slightly lower than the rest of Insight's operation in the United States.

Although, we have initiatives that have and will continue to reduce operating expenses, we continue to invest in facility improvements in the United Kingdom and in [Thai Chi] resources that focus on continuous improvements of our website, operational efficiencies, dedicated integration personnel and transactional processes which -- with customers and suppliers.

Looking at the balance sheet, we ended the quarter with 155 million in working capital compared to 160 million at December 31, 2001.

Accounts receivable totaled 470 million as compared to 297 million at December 31, 2001.

Days sales outstanding in [ending] accounts receivable were 50 days at June 30th 2002 as compared to 49 days at June 30th 2001 and 52 days at March 31st 2002.

Inventory levels were 80 million at June 30th 2002 as compared to 34 million at December 31, 2001.

Annualized inventory turns were 63 times in our second quarter as compared to 96 times in our second quarter of 2001.

The increase in inventory and corresponding decrease in inventory turns is due to the acquisitions of Comark and [Action] which initiate very few drop shipment and an increase in the opportunistic inventory purchases.

In Q2 2002, 66 percent of Insight's shipment to North American customers left to non-Insight distribution facilities, down from 75 percent in Q2 2001.

In Europe, the direct shift percentage is down from 50 percent in Q2 2001 to 42 percent in Q2 2002 due to the acquisition of Action.

Although overtime, we expect to see an increase in direct shipments in the UK, we do not expect to see an increase in direct shipments as a percentage of sales in the US, as we believe there is need to have some inventory particularly, when opportunistic buyers are presented and when servicing the larger corporate enterprise customers.

This gives you a recap for the second quarter of 2002.

Now we will provide guidance for Q3 2002.

We expect consolidated net sales for Q3 2002 to be in the range of 840 million to 900 million and diluted earnings per share to be between 23 cents and 29 cents excluding non-recurring charges related to the restructuring of Insight's United Kingdom operation.

Overall, we believe sales in Q3 2002 will be consistent with Q2 2002.

Remember, though that Comark is included in the operations for the entire quarter in Q3 2002.

The range that we are providing allows for possible reductions in sales during the quarter.

We expect gross profit percentage to decline due to the addition of Comark for the entire quarter and a possible reduction in overall software assurance product sales, which are recorded as net revenue.

Operating expenses should remain flat, expect for an additional $1 million consisting of increased depreciation of fixed assets and amortization of intangibles assets in connection with the Comark acquisition and retention bonuses for select employees who are essential to the integration process.

Additionally, we are conservatively assuming in our guidance, a slight decline in our UK operation results in the Q3 2002 comparative to Q2 2002.

Finally, we currently anticipate that the restructuring charges in the United Kingdom will be approximately $2 million, which again, is not included in our guidance for earnings per share.

I'll now turn the call back to Tim for final comments, Tim.

Thanks Stan.

Now that we've revived our financial performance for the quarter and the status of some key operational changes we're undertaking to accommodate the growth of the company, I will discuss a few items going on the industry, how they relate to our business, and why we feel optimistic going forward.

As you undoubtedly know, the deadline for the current Microsoft upgrade program is July 31st 2002 and software sales in Q3 2002 to date have held strong, specifically Microsoft.

Our numbers for software should be very good for Q3, even if sales for software come down in August and September.

Although software sales have increased over the past several months, we do not expect to see a significant decline after Q3 2002.

A reasonable number of customers have taken advantage of the current Microsoft upgrade program; however, an even larger number of our customers have not.

Therefore, we expect software sales to remain solid in Q4 and beyond.

Elsewhere in the industry, HP continues to work towards their integration with Compaq and we feel that this presents an excellent opportunity to become increasing more competitive with Dell, specifically in the Desktop and notebook market.

As it was mentioned earlier, the overall process of combining Insight and Comark is a slow and methodical one.

Our primary concerns are around customer satisfaction and ensuring little to know revenue disruption with the process of the integration.

Because of this, the synergy savings on the SG&A side and on the product cost side are going to come in slowly in the next year.

We are very happy with the overall process of the -- progress of the integration, but the sheer size and level of detail involved makes us move very cautiously, yet strategically.

A subset of the overall integration is the merging of the Insight and Comark services organizations.

A lot of the services business historically has been, what I would call traditional, whereas a lot of the focus today is on the new areas, such as wireless telecommunication, asset management and life cycle product management.

All these initiatives are moving along nicely.

We will soon be announcing an Insight branded software product in an ASP format around asset management, hopefully during Q3.

We believe this project will have a positive impact on the customers and on the relationship with Insight.

This asset management life cycle focus is also intertwined with our Insight global finance division, which is focusing on alternative financing solutions, such as leasing and business revolving credit.

We will not hold the paper on the leases ourselves, but instead refer them to third party leasing companies for a fee, as we as -- have always done in the past.

We also have a new public sector president, who'll be announced in the next few weeks, and this will bring together both the Insight and Comark Government and Education groups and we are extremely excited about this process and it brings after [wishing] a very long and exhaustive search process for that individual.

Additionally, look for some major upgrades on insight.com website and features and functionality over the next couple of months.

As you can see, we have lots of initiatives moving forward in a lot of areas.

Despite declining economic condition, Insight historically has sustained stable growth and performance, and we strongly believe this is a reliable long-term trend for our business model.

We are optimistic that the isolated difficulties we experienced in our UK operations during Q202 can be overcome by the end of the year.

We have an excellent group of folks and resources throughout the organization that will help us track new opportunities for growth, and we remain confident in the future outlook for the company as a whole.

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 "*" then the number "1" on your telephone keypad.

Your first question comes from Matt Sheerin of Thomas Weisel Partner.

Yes thank you.

Regarding your guidance, I'm just trying to figure out exactly where the gross margin is going to go -- given the UK, given Comark, and also given the expiration of the Microsoft program because it looks like based on your EPS and your revenue guidance, operating margin falls pretty substantially below at 3 percent.

So I'm trying to figure out how much of that is UK, how much is gross margin?

Maybe you could be a little bit more specific about where the gross margin is going to go.

And then as a follow up, you know, what's the time for you for getting back to the 3 percent operating margin and then above that?

Okay Matt, this is Stan, and I'll try to give you some guidance on the gross profit percentage.

First of all we did give you in conference call the effect that the software assurance products had not only on this quarter but last quarter which should help in their -- from SEC filings that we have made recently.

You can find out exactly what Comark's gross profit percentage has been historically, which should give you a guidance on the effect of Comark by adding one more quarter into our mix.

Having said all that, I think, probably in order to help you a little bit more the guidance that I would probably give would be right around the 11 percent or little bit above that in that range.

Okay and then -- and is that sort of a number -- is that a number you are trying to bring up either you know buy opportunistic buying or other things or there are other plans to get that to, you know, the mid 11s or...?

Yes, at this stand again, Matt, overtime I definitely think that can come up.

I think there are synergies in purchasing power that can be garnered; those we don't get all at ones, it comes over a period of time.

So I believe that there is an upward movement on that, but again your question was specifically toward Q3, and I tried to give you...

Sure.

...a pretty good range there and the justification for it.

Okay thanks, and then also the sort of timeframe or at least internal goal to get to the 3 percent operating margin -- sort of what quarters, is that two quarters away, three quarters away?

Well, that's probably the 64,000 or [indiscernible] -- this is Tim.

I think it's probably two to three quarters away on a consolidated basis.

I really want to get my arms around the UK, 100 percent.

And hopefully, we can give you an update in 30 days or so.

Okay, thank you.

Thank you.

The next question comes from David Manthey of Robert W. Baird.

Hi guys.

My question on the restructuring charge.

In the previous conference call, Tim, I think you said that there was not going to be a restructuring charge.

You said it would flow to the P&L, and you said it would be not a big deal at all.

And seeing a $2 million restructuring charge, I was a little surprised.

I was wondering if one of you could explain the change of heart over the past week and then may be the components of that?

This is Tim.

It hasn't been changed of heart at all.

We definitely wanted that through the P&L.

We wanted to break it out so you had an idea what it was specifically.

We wanted to make sure that we gave as much information as possible.

Part of the thing was as you can see with the guidance and specifically with those numbers, we're trying to be very conservative.

So we're saying, as an example, up to $2 million.

We are not sure exactly what's going to be it, and again I'll be on the ground next week.

I just want to give at least as much guidance as possible on the conservative side of approximately where we think it might be.

Given that that we just had a sales shortfall in the UK and you were surprised that the costs weren't cut commensurate with the sale decline, what -- why do you need to spend $2 million to cut costs over there if you expected the former management to cut those costs commensurate with where the sales were gong?

Part of that obviously will be severance cost.

The other one is just restructuring cost and potentially getting out of contract, leases, whatever it might be.

So we're trying to be as -- again as concerned as much we can in terms of the guidance we give right now to make sure that we don't go over those numbers.

I'm not sure that I can give any more detail color on that specifically.

Okay, then one more question on the guidance.

If you look at the current revenue run rate and you add in an additional one-third of Comark's, say that's 115 million, you can get to 850 million in revenue, which makes sense.

On the EPS guidance the 23 to 29 cents, that seems quite low to me given that, hopefully, by then action is starting to improve.

You have an extra one-third contribution from a supposedly accretive acquisition in Comark.

Why would EPS under any of those circumstances be lower than the current quarter?

Dave, this is Stan.

A couple of things.

As I said in my guidance, first of all, we are conservatively assuming in our guidance a slight decline in our UK operating results, so meaning more loss.

Okay, that does not mean it will be there, but that's what we're assuming from a conservative point of view.

So that's one possibility for it.

The other is, I indicated in my guidance operating expenses, which relate to the Comark acquisition specifically retention bonuses for select employees who are essential to the integration process.

All those total about $1 million that are in there.

Additionally, take to account, which I'm sure you will, the decline in the gross profit as a result of another quarter of Comark and then if you take that range of 840 to 900, depending on your top-line sales, I think your model will work out that it comes in that range of 23 to 29 cents.

This is Tim.

Part of this is also this is that, you know, could there be upside?

Yes, but we do not want to anticipate nor give guidance assuming any upside versus Q2.

We'll be very conservative.

Okay thank you.

Our next question comes from Brian Alexander of Raymond James.

Thanks.

Just a question on the gross margins for the June quarter.

By my math, it looks like even if the UK was on track, you would have come in lower than your expected range of 12 to 12.2 percent.

I'm just trying to understand what were the main factor is causing that.

Was it additional pricing pressure in Comark or higher percentage of Comark sales?

Was it rebates that caught you off guard or what was the main contributor there?

Hi Brian, again you're correct there.

It was lower and as I said earlier, basically due to some product margin deterioration and I would say if I had to -- I stated it was probably in the enterprise sector.

Okay, and then with respect to Action you may have answered this on the last conference call.

Do they have a history of backend-loaded quarters in particular in the June quarter and could you help us ball talk the percentage of sales that are enterprise related?

This is Tim.

On that specifically, historically, they were a UK public company, so they were on six-month halves.

So it's hard to give apples-to-apples comparison on that.

Okay, now my belief is any -- you know any time you have an end of period, you are going to have some kind of ramp, obviously different everywhere.

Specifically, on that, it's -- less than half of that business is in the enterprise space, so that's at almost a -- it's approximately a third right now.

So, given all those sales volumes should be obviously be closer to half of the, you know, previous sales volume.

So that will hopefully give you kind of an idea of where that business is at right now.

Okay.

And then my last question is on direct alliance.

It looks like the revenues were down sequentially but you managed to keep the profitability the same.

Is the revenue decline just due to the classification of pass through, since pass through was a little bit lower as a percentage of sales?

And if that's the case, wouldn't gross margins be higher, given that those are lower gross margin?

And then, you talked in your press release about a closed program, could you give a little bit more color on when that was closed and how big that was, and then perhaps, who the vendor is?

Ok Brian, this is Stan.

I hope I'll be able to remember all the stuff you said.

First of all, in terms of the gross margins what you first said is absolutely correct.

They did have -- they held up fine on service of [tight] programs and the [Aspyr] sales were down 12 percent.

Your specific comment, if I believe, doesn't that mean that your GP should have gone up.

That is if the programs within the company remained the same on a GP basis.

They took on additional programs from current customers; one in particular that was at a lower gross profit percentage, and therefore, it defeats your conclusion of [indiscernible] at a higher GP percentage.

And then, in terms of -- the third question was if there was a closed program.

We really don't announce the names of closed or open programs.

And [indiscernible] Brian, I might also say that it was a minor program.

Okay, that's all.

Last question, any thoughts on a share buyback?

That's something that we can always look at, and we really have no definitive conclusion at this point.

Thank you.

Your next question comes from [Doug Rudisch of Brookside Capitals].

Its been answered.

Your next question comes from Bruce Simpson of William Blair.

Hi guys.

I realized that you're throwing Comark into the pot with core North America, but are you willing to talk about outside of Comark in sort of classic Insight, what the sales trends were either sequentially or year-over-year in the second quarter?

Okay Bruce, this is Stan.

First of all, lets amplify something and make sure everybody understands this.

Every day that goes by, Comark is becoming less and less the Comark that it was before.

We have moved SMB from Comark down to Insight; we have moved enterprise up from Insight up to Comark.

We have taken out and put into a corporate organization certain functions.

So Comark, there is not an apples-to-apples comparison, besides the fact that we only have two segments, which are Insight's direct alliance.

Now, having said that, your question was the basic Insight sales, how is that doing and it's doing fine.

It's a bit flat which again in this environment, I would equate as fine.

So hopefully, that answers the question.

Sure.

And then now, another question, if I could ask for more specifics about what you're seeing so far in this quarter from upgrade assurance, is your experience that it is selling, lets say, even more hotly than June or the prior quarter or was June kind of the high water mark of that?

Bruce, this is Tim.

I gave a little bit of color on the conference call on the scripted portion.

We're definitely seeing a big uptick in July and because of that, we're anticipating that August and September will come down a little bit because of that.

But we're not seeing, you know, every single customer go out and buy it, as an example.

So there's a lot of customers out there.

We think, given the economic environment that we're seeing, all customers are saying, "Hey, I don't want to spend any money on, lets say, on software assurance," lets say.

So they're going to delay their purchases until the next rep comes out whether it's Q4, Q103 or whatever it might be.

So -- but we're definitely seeing a big increase in July.

Correspondingly, we think, that'll equate to less of a -- or less sales in August and September specifically, but for the quarter, it'll come up about where it was last quarter.

And Tim, when you say a big increase in July, do you mean over the levels you saw in the June quarter in the upgrade assurance program?

Yes, yes on a month-to-month basis.

All right.

Okay, then the last thing has to do with what you're seeing in the public sector business?

I don't know if you're willing to breakout the kind of Insight classic versus Comark or if it's all two mixed together at this point.

But can you tell us either, you know, total percentage of firm revenues or whether that's up or down from what Comark was doing prior to the integration?

Thanks.

Absolutely, again it's approximately 250 million annualized in revenue.

Right now, there is tons of shuffling going on back and forth, we have -- again, we have a new president coming on line in that division, and as we shift things back and forth, I don't think it's a material change up or down in that space.

I would hope that we should start getting traction towards the latter part of Q3, early part of Q4 in terms of that business.

So, you know, considering the overall results, it's not going to have a huge impact positively or negatively.

Hopefully that gives you some color there.

So, is any seasonality in that business built into your revenue guidance for the third quarter?

No.

Nothing no -- not that's going to be material to the overall results.

Okay, thanks.

Sure.

Your next question comes from Rob Damron of SWS Securities.

Good afternoon.

Just a question about -- about a month ago, you had a press release out talking about the $25 million of incremental synergies from the Comark acquisition, and I was wondering if you could just kind of help us.

Over the next several quarters, how much of that 25 million should we expect per quarter?

Even starting in the third quarter, you mentioned you've already done some consolidation of warehouses, what that might save you?

And then ultimately, when you get the full IT conversion, you know, do -- at that point do we have all $25 million of savings?

Let me start by saying -- we think it's up to, but we think 25 million is probably a reasonable number when it's totally done.

Now, the issue is going to be the following -- is that, we think we have a pretty good plan on track but we don't actually want to give guidance on that in terms of specific quarters until we actually -- we have the actual result, so to speak, until we accomplish it, not kind of give you the full preview.

So I like when you're leading me -- from the point of you saying, we'll give you on a quarterly basis.

So what we're going to do is that at the end of each quarter, we'll go back and say, "Hey, this is how much we got and this is -- you know, somewhat we're on track on a going forward basis, the new x, y, or z."

But we definitely want to do it from the same specific number in arrears, not on a go forward basis.

This because we're not positive exactly, which quarter's going to come in.

So to be conservative, we want to say it after we've accomplished it.

Okay.

Well, without giving exact numbers then would you expect to have at least some savings in the third quarter?

And then, when would you expect to have the full savings?

Would it be the end of next year?

Is that -- will that be a reasonable assumption?

In terms of the end, you know, I would assume that we would give it all by the end of 2003 because everything will be unified by that point for sure.

It may come before that as an example.

Now in Q3, we've got a couple of things we may realize some savings but we've also got some additional costs from moving facilities and consolidating and again the -- some additional payments out there.

So, I wouldn't count a bunch of upside in Q3 in terms of synergy savings either.

So, when we say we're being flat quarter-to-quarter, that's pretty much, you know, putting in the positives than the negative.

Okay, and then one other unrelated question regarding inventory turns and the expectation for, you know, how much of your business will be dropped shift going forward.

If you're going, they'll be holding more inventory as a entity going forward.

When do you expect that the overall gross profits might improve because you'll have incremental buying opportunities going forward?

That's absolutely the goal.

I will tell you that especially in Q2, we did not get a lot of synergies in that area specifically.

If you think back, let me give you a quick timeline.

Obviously, we spent most of our April focused on the actual acquisition itself, you know, the mechanics of the deal, and then, we really spent the next 60 days really going through the personnel; helping people, "Hey, this is who's going to go, this is who's going to stay."

Identifying who's going to stay for a limited period of time; giving them [indiscernible] and incentives to keep them around during the process as an example.

Now, as part of that really it's Q3 and Q4, we're going to focus specifically on what you just said, which is buying synergies.

Now, again, I hope we get an uptick both on the gross margin side and hopefully on the supply and reimbursement side.

But again, until we actually accomplish that, we don't want to go out and say that we're going to do something, we want to tell you after we've done it, as an example.

So I would hope that we could -- we should be seeing that [sector] both of those in Q3 and Q4.

Specifically around Q4, because we should have most certainly implemented or at least a majority of it by then.

Okay, thanks.

Thank you.

Your next question comes from [Mark Schleber] of [Greenbook Capital].

Yes.

Hi Stan.

Question in terms of, you had talked about the North American core business, ex Comark being flat.

Are you ready to say anything about them in the quarter moving up at all going forward here or are you anticipating flat for the rest of the year on a sequential basis?

What we said Mark, this is Stan, is basically that we expected it in Q3 to be flat.

That's what our guidance is taking into account.

Okay, and on the Comark revenue, are you guys seeing more revenue sticking than you anticipated before the deal?

This is Stan, Mark.

Actually, yes.

I think I don't know whether I talked to you specifically, but I have said that, you know, in my modeling on acquisitions, I usually allow for a percentage drop off in revenues and quite frankly that hasn't occurred in Comark.

It's held in very, very well.

So you're saying you haven't seen any drop off in terms of 1.5 billion run rate?

Well, first of all, lets go back -- a while back when we announced that -- we said at that time that about 1.5 billion run rate, that there was a portion that were to competitors such as us and CTW and that that would no longer stay there and that amount was approximately $100 million on an annual basis.

That's what we said in previous quarters.

So consequently that leaves about 1.4 billion left.

As you can see, they are running at a pretty good rate right now.

Correct.

When you take that into account; so, hence the answer that I gave you that, I think, we're pleasantly surprised on how much revenue has been retained there and as Jim said in his portion of the conference call, the customers seem to be happy with this acquisition.

This is Tim.

Let me you give you some additional color on that?

We talked about it in another conference, but specifically around -- there's been two key areas that I've been focused on is -- number one is, obviously, to keep in the revenue; number two is keep in the key employees.

I think we've done a great job so far doing both those.

Now, the negative part of it -- downside of that is that that extends [half the time] of integration, but we believe that it's more important, for the long-term success of the company, to keep the employees and keep the revenue base.

So, we probably are going about this much slower than we normally would have, lets say on an action, specifically when the fact that we wanted to retain both -- all of the revenue stream and if you look at it, we've retained basically all the revenue stream and [certainly] with employees.

We have not lost a single key employee that we wanted to keep.

So not going red, we've done a good job in those two regards.

Okay, thank you.

Thank you.

Your next question comes from Brett Miller of AG Edwards.

Hi everybody.

Can you hear me?

Yes.

Okay.

I was just curious on a couple of questions here.

A, with Direct Alliance going forward here, should we see in the normal Q3 seasonality there and also go back to ARs if we should see any sort of aging or anything -- or if you are seeing any aging with the ARs that you've acquired from Comark?

Brett, this is Stan and first of all on your first question on Direct Alliance, no, you shouldn't see seasonality here.

I think what you're referring to is they used to have a large educational program which has since brought it back on the way and so that seasonality is not there.

So, I think, that's what you're referring to.

At any rate, there should be no seasonality and then your second question was what Brett, I'm sorry?

Just looking at the accounts receivables went up due most of it to Comark, I presume, and I was wondering if there was any aging or any issues that you're all looking at there, any large customers or anything?

This is Stan again, and the receivables did go back and the reason is this is primarily because of Comark absolutely.

DSOs did go down though two days.

Can it still go down more?

Absolutely, it can.

That's something that we need to focus on along with the other things that we're trying to work on, but we don't have any indication or concern of unusual exposure in that area.

I think I have told in the past whether it was six years ago or whether it was last year, bad debts from all sources including returns with CODs; and that's where your credit card have always been, around 0.3 percent of net sales, and they continue to be that way even into Q2.

So, I don't think there's any unusual exposure there.

It's simply been an increase from a much bigger company now.

One interesting comment that the system is -- on the Comark side, if you look at the credit quality of the Comark customer base, it's actually dramatically higher in the credit quality of lets say Insight's base due -- the thing that Insight has historically on the F&B side is just a much broader diversification of receivables and, you know, just sheer number of accounts as example.

One more question for you Tim.

If you look at it, the actual management and the [ohm] chart, I guess, primarily Tony is working on the integration side.

You and Eric are over there in the UK.

I guess it's a simple question.

Who's watching the store in North America and then I guess everything reporting then to -- from an unrealistic standpoint back to you Stan.

Well, I mean, one thing is that is -- if you look back at what has been happening, obviously, I was focusing most of my time on North America.

The good news and bad news about today is that with e-mail, voice mail and cell phones, it doesn't really matter where you locate it.

And so, obviously, I spend a great deal of time on the road.

So, the fact that I am physically in the UK, will I be focusing a lot on the UK?

Absolutely.

But I'll still be, in essence, reachable, 24 by 7 like I am now.

With you actually being a night out, you'd be almost on the same time frame then as everybody else in Phoenix now?

You know that from our earlier calls.

Thank you.

Your next question comes [Cowen Campbell] of [Good Bye] Capital.

Hi, just a quick question on restructuring charge.

I thought I read in the press release that it said that that was being excluded from the 23 to 29 cent range.

But then I thought I heard Tim say that you guys were actually running that to the [peniles], if you could just clarify that?

Thanks.

Cowen, understand it -- that is not included in the 23 to 29 cent range.

Great, thanks.

Thank you.

Your next question comes from Sterling Levy of Morgan Stanley.

Hi guys.

A few quick questions if I could.

The first is on action in the UK.

Do you think it's - do you plan to look at the split between the enterprise business and the F&B business?

And I was wondering if you could just comment on which of those two pieces you thought was more attractive?

My next question is, and I'll just get all three questions out.

My next question is, given the commentary that Hewlett Packard has made about potential changes to their channel strategy and their sort of body language of wanting to take more large businesses direct, how do you think that might impact your Comark business and your focus on the mid-to-large size company.

And then, lastly, if you could just remind me of your -- the current credit facilities that are in place?

That would be great.

Thanks guys.

Sure.

In terms of the UK, I think that, specifically, we like both businesses specifically obviously yes [indeed the] routes.

So, we'd probably wean that way a little bit.

But on your second question, which I think is probably the most pertinent, there's no doubt that HP-Compaq is definitely changing the rules a little bit.

If you look at the Comark business and you drill down a little more and potentially next quarter, we'll get a little bit more color on this also; which is, if you look at Comark, they're not really fortune 50 or fortune 100.

What they really are -- is, I'm going to call it, you know, mid market of the large guys.

Really it's a 1000 to 5000 seats.

They really don't go after, as an example, the Ford Motor companies, folks like that that have just huge, huge requirements.

It's really that small large enterprise.

So, when I look at it, as an example, in HP, hey, is everything up for grabs not only on the large enterprise but everywhere because, in effect, it meant that it's actually going through restructuring.

You've got to adjust to whatever the new realities are, good and bad.

But specifically around the large enterprise business, you know, I'm always concerned about everything but I'm not panicked about this.

Sterling, this is Stan.

And on the credit facility question, we have a $200 million line of credit.

Thanks very much guys.

Thank you.

Your next question comes from John Lawrence of Morgan Keegan.

Good afternoon guys.

Tim, would you comment a little bit and just take it one step further on Comark and talk about it's configuration, strengths and how important that is and a little bit more on what you did to the changes relating to that integration?

Well, when we went back and looked at processes.

Let me just kind of simplify here.

Lets say there's 10 major items you do in the integration process out there; we might have done three of those, Comark as an example did nine of those.

So we had a huge overlap in terms of our capabilities but a dramatic increase in our overall ability to go out and service those customers.

One of the big upsides towards longer term [specifically] once we, you know, get some of the IS stuff, is to take the configuration technology to Comark and give it to all of our larger SME customers, really that 500 seat to a 1000 seat of customer base.

So from an overall perspective, we think, we can get a big upside for us.

But again, it's not going to happen overnight.

We've got to have the ability, as an example, for a -- an SME [rap], to be able to get in there, configure how to utilize the tool set, get it out, get the configurations and deliver to the customer with the same efficiency that we did our own operation and, obviously, that's what we're focused on right now through the month of August, in getting that moved over and fully operational by September 1.

All right, thanks.

Thank you.

At this time, there are not further questions.