Insight Enterprises Inc (NSIT) 2002 Q3 法說會逐字稿

My name is Tina, and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Q3 2002 Insight Enterprises 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 star then the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound 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 will be discussing the company's earnings results for the quarter ended September 30, 2002.

Joining me, Stanley Laybourne, Chief Financial Officer, is Tim Crown, CEO 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 Web site at insight.com under our Investor Relation section or you can call for one at 480-333-3486.

Since detailed financial and operating data are contained in the earnings release, we will only be concentrating on the highlights of the quarter during the scripted portion of the conference call.

As usual at the conclusion of the scripted portion, we will answer 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 info/Investor Relation/Conference Call.

An archived index copy of the conference call will be available on the Investor Relations section of our Web site approximately two hours after completion of the call and will remain for approximately two weeks.

This conference call and the associated Webcast contains time-sensitive information that is accurate only as of today October 24th 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.

All forward-looking statements that are made in this conference call are subject to risks and uncertainties that could cause the actual results to differ materially.

These risks are discussed in today's earnings release and also in greater detail in our second quarter 10-Q.

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

Thanks, Stan.

Hello, everyone, and thank you for joining us.

We are pleased to report for the Q3 '02 operating results are inline of what we anticipated it would be at the beginning of the quarter.

Our consolidated net sales for Q3 '02 were 854 million, which is within our original guidance.

Diluted earnings per share were 24 cents excluding the UK restructuring charges.

Including restructuring charges in the UK at 1.5 million, diluted earnings per share were 22 cents.

Later in the conference call, Stan and I'll discuss the specific results of operations and financial statistics for each of our operating segments.

First, I'd like to spend some time talking about the business, specifically discussing the status of Insight's UK operation and an update on Comark integration.

For those of you who may be new to Insight, our UK operation represents about 13% of our total net sales but because of recent events it has become an issue we need to address it in greater depth than we would otherwise.

To give a brief background, we acquired Action PLC in Q4 '01 and in a rapid integration to turn them around to profitability and we were very successful obtaining operating profits in Q1 '02.

We then experienced problems, which resulted in reduced sales and increased operating expenses in the UK that caused last quarter's operating loss.

As we will discuss, we took immediate actions to correct those problems.

Looking at specifics for Q3, Insight UK posted net sales of 106 million, an increase of 17 million over Q202 primarily due to Microsoft sales.

The operating loss was approximately 2.7 million (ph), which includes 1.5 million of severance costs associated with headcount reduction.

Despite the increase in net sales, again primarily due to surge in Microsoft sales in July, gross profit percentage was down and expense savings from headcount reductions and changes in business processes and strategic direction that occurred in Q3 '02 will not be realized until Q4 '02.

Immediately after our Q2 '02 earnings release, I was in the United Kingdom along with Eric Crown, Founder and Chairman and Paul Kent, Senior VP and Interim UK General Manager to review the integration plan and develop a short-term business plan for remainder of Q3 and Q4.

We talked to employees, analyzed all aspects of the business, and a bright spot we got from the UK is that the fundamentals are in place.

And despite a challenging IT environment worldwide, the Insight model directed towards SMB (ph) customers is working well and positioned for continued profitable growth.

We made many changes to the UK business model based upon on our assessment and observations while being in the UK in August.

Many of the changes that we outlined have either already taken place or are in motion to be executed in the coming months.

The first realization was that after the integration was completed in April, the operating structure of the business had not been modified and asking (ph) more of variable versus a fixed model.

On the previous structure, our breakeven point was fairly high but the sales above that were very profitable.

Insight's long term model is more of a variable model.

We become more profitable as we grow but not dramatically more profitable.

We make changes to the way the business runs and are now much more variable in our cost structure.

One observation we made was that operationally whether it was consumer, small business, medium business, or large enterprise, we were pursuing every customer base with a large fixed overhead associated with it.

The reality is that in this kind of an economic environment with a newly integrated company the focus of our synergy needs to be directed primarily towards our target -- market of small to mid sized business customers and larger corporate customers that we are capable of servicing and supporting.

In our second and refocusing the integration plan and refining our strategies we took the following immediate actions.

First, we changed the management structure.

Our original plans were to retain the existing chief operating officer position short term through the integration process.

We eliminated this position the same time we asked for the resignation of the President of our UK operations and immediately commenced the search for a new Managing Director, which culminated last week when we announced that Stuart Fenton will take on the leadership role and actively drive the Insight model in the UK going forward.

Second, we discontinued plans for our business to business Internet portal.

The Internet portal was originally envisioned by action management pre acquisition to bring together buyers and sellers of computer products in the community environment.

The sales approach was very different from Insight's model, for the decision was made not to pursue this business activity.

We also implemented the original decision to reduce face to face sales in the UK and focus on outbound sales with limited face to face presence targeting business customers that want that contact.

We will continue to have an experience staff of face to face sales executives in the UK in order to appropriately service the needs of our European corporate customers.

In contrast, in the United States the nature of our corporate customer base, our mature sales organization, as well as the advanced customer service capabilities acquired through Comark supports participating in the corporate market segment on a much broader scale.

Over time we'll bring these capabilities to the UK and to Canada.

Further headcount reductions in various departments were completed in September.

The overall reduction in headcount resulted in 1.5 million to severance costs in the quarter as operating expense in Q3 '02.

Reductions associated with decreasing operating costs to match demand and $1 million of severance cost associated with integration plan recorded as additional goodwill.

Looking ahead to our Q402 business plan and forecasts for the UK, we are cautious of the business environment that exists right now, and we assume that adjusted for the surge of Microsoft sales in Q3 the remainder of the UK will remain flat.

We are also optimistic that we would be able to improve performance internally, maintain relatively stable sales volume and return the UK operations to profitability.

We revised the UK business plans to concentrate on further reducing costs, improving margins, and integrating the Insight model.

Primary areas of focus for Q402 include transitioning Stuart Fenton into his role as Managing Director of the UK.

We are very excited to have Stuart on board; we have known Stuart for several years when he served in various management positions at Micro Warehouse.

He is an extremely bright professional with experience in the industry, specifically in the UK, and he has strong relationships with the suppliers, a drive to succeed, and a belief in the success of the Insight model.

Moving into our new Sheffield facility and reducing operating expenses, we have completed the renovations of the facility we purchased last year in Sheffield, and we will be moving in during November.

This facility will not only consolidate operations within Sheffield but provide a dynamic team-oriented work environment for our UK employees.

Other specific areas of focus in the Q4 business plan include reducing product returns, increasing product gross margin, increasing freight margin, and continuing to focus on driving the details associated with improving profitability.

Although this is just a sketch of our UK business plan, hopefully we can provide you with an understanding of the directions for the next few months.

We are confident of the initiatives currently in place to turn the UK operating margins to at least breakeven in Q402 on sales of approximately $85 million to $95 million.

We are working closely with Stuart Fenton to fine tune the operating strategy for the UK to incrementally increase profitability over the next several quarters.

Now, I'd like to discuss the status of the integration of Comark.

We had previously stated that the Comark name will be eliminated by the end of 2002 in favor of one unified Insight brand.

Additionally, some areas of Comark had been integrated with those of Insight.

And therefore, what remains in Chicago cannot be compared revenue wise or expense wise to the business of Comark pre-acquisition.

Nevertheless, until the main transition is complete, we will continue to refer to Comark for convenience in this call.

I'm extremely happy with where the integration is at this point.

We have accomplished our top objectives, no material loss of revenue, no loss of key sales executives, and no broken relationships.

If you look at the top 50 accounts, they are purchasing much less than they did in 2001.

One key point is that we didn't lose business to our competitors.

The customers just aren't purchasing at the previous levels right now.

The outstanding news is that we have drawn on new customers to offset the lost revenue of some of our customers who have cut back on their purchasing.

The ability of the sales force on the corporate side of the business to shift gears and acquire new customers in this environment is tremendous.

If the winds of demand pick up at all on the corporate side, we are positioned to take advantage of the upturn.

However, we are putting strategies in place, which will allow to grow the business even if demand does not increase.

In last quarter's call, we provided a fairly extensive list of departmental consolidations we're undergoing for the purposes of achieving cost savings and eliminating redundancies.

We also stated that the majority of the savings associated with the unifying of Chicago and Tempe based operations will be realized once the conversion of our two IS systems are complete.

This quarter our update amongst the integration process is regarding the decision about one consolidated IS platform.

We had some completed comprehensive business requirements analysis and have chosen to move Comark away from SAP and use Insight proprietary system, which you may hear us refer to internally as MAX as the unified IS platform.

We are currently upgrading Max to incorporate new functionalities that will accommodate this system's needs for the total operating operation, including large enterprise and public sector business.

And this new consolidated systems, would be known internally only as Maximus.

Given the complexity of the enhancements necessary to complete the newly acquired functionalities.

We anticipate that the system conversion will be completed within 12 months to 18 months from now, which is about three months to six months longer than our previous timetable.

One of the big reasons for the extension of time is that now while we've taking the best of those systems we are adding functionality to the system above and beyond what either system had before.

The other major reason to extend out the integration time is to ensure that there is no customer impact from an operational and deliverables perspective.

Keeping revenue during the transition is paramount to us.

Over the years, we have constantly improved our total systems, and we'll continue to do so.

Our primary concern is to ensure that we do not adversely impact our customers during these upgrades, and we will continue to take this approach as we integrate Comark and upgrade our overall systems.

My main two concerns in the Comark integration have always been, number one, customer relationship and customer impact.

Don't lose the revenue or negatively impact a customer.

Number two, keep the sales executives and keep the relationships.

To date, we have executed extremely well on both points.

We have not lost any major customers nor have we lost any key sales executives.

One thing that we are not focusing on right now is squeezing the last over all the cost structure, between Insight and Comark.

In fact to ensure that we have no customer impact, we are not -- we are even giving numerous people in Chicago stay bonuses to make sure that even if their job is eliminated when the integration process is complete, they have a financial incentive to stay around through the integration process.

We recognize this is not particularly cost efficient, and will not contribute the boost in EPS in the short run.

But this employment strategy is the best for our customer and our business in the long run.

We are running this business as a marathon not a 100-yard dash.

Do I want to maximize EPS on a quarterly basis?

Absolutely, but not if it detracts our long-term business prospects.

What became very apparent to me over the past six months is that we have a choice of putting companies together quickly to realize some fast cost savings, or we can choose to do a better job and focus on the long-term solution.

This solution is all about taking the best from each the operating entities and moving both sides to the next generation.

For Comark, this means going out to a tremendously easy and effective order (inaudible) system, increased screw count, and adding a highly successful outbound (ph) calling system to compliment the tremendous space to sales system.

Excuse me.

For Insight's SMB business, it means adding capabilities on both the front and back ends that are beyond what we ever thought possible.

Comark's advanced integration and configuration, order fulfillment and overall product delivery with value-added capabilities are second to none.

When you look at the work flow, order control and approval process that Comark has on their Web site, not even Dell is close.

As we integrate this industrial strength of work flow in the insight.com Web site, we're going to give our SMB customers control over order flow they never thought possible, control never previously given to small to mid sized business customers.

In my opinion, no one has all the capabilities that Comark has in these areas.

That's why even today, we process thousands of Dell computers every quarter on behalf of our customers, since we're the only people that can accomplish everything that customers want.

Add in the centers of excellence around networking, storage and overall services, and you have a value add that enhances Insight's small to mid sized business customers.

In addition to the expanding array of third party services that we make available to customers through Insight services, Comark's technical capabilities will be a very attractive enhancement to our existing SMB relationships.

This, in fact, is the real story behind the Comark acquisition as it allows Insight to expand beyond being just a product reseller to being a total solution provider, something that we think is necessary for long-term survival and prosperity in this highly competitive market.

To give you one illustration of our recent success story, an Insight customer needed 130 servers assembled in 14 racks and shipped within 15 days to bring the customer's new data center online.

Ordinary product delivery sellers could not compete for the business.

Competing against direct model manufacturers, Insight offered a fully integrated rack solution consisting of complete assembly, configuration, warranty and (ph) quality assurance and delivery to the site on time.

Our advanced integration lab sorted through (ph) 385 orders for 1,907 parts, with constant changes and no two servers alike.

And allocated shipments from the factory beat the clock.

We delivered all 130 servers in just 10 days, five days ahead of schedule.

The customer was thrilled.

A level of advanced customizable capabilities that we now offer to all of our customers is truly unmatched in the industry.

We have accomplished a great deal in six months with the Comark acquisition.

Select functions of the two operations have been consolidated.

A comprehensive integration plan has been developed.

We've been successful in ensuring minimal sales disruption during this transition.

As we reposition Insight not just as a product provider but also as a total solution provider being able to offer both products and services across all customer bases becomes a huge differentiator.

The mission of this integration is to be able to offer straight products or total solutions to everyone from the smallest to largest of our customers.

When we complete this integration, we believe no one else will have the same strength or capabilities.

Our strategy is simple channel domination.

We are not tuning to be a good second source to Dell we're not tuning to be a solved number two behind CAW.

We are striving to be number one.

We want to be the supply to our business customers.

Many people want to try and draw comparisons between our UK integration and our integration of Comark.

I want to state that these integrations are as different as night and day.

Do we have a problem in UK?

Absolutely.

Did we jump on it?

Yes.

We assessed the situation, we retrenched, retooled, and we're now hard charging forward again.

The fundamental difference between Action and Comark was that Action was a failing business while Comark was a successful business.

What happened in UK didn't changed our overall business plan one bit.

If anything, it gave us greater resolve to not rush forward with our Comark integration and it gave our organization more determination, more energy to go out and show everyone that it takes more than bump in the road to stop Insight.

We've thousands of co-workers across the world who are simply not going to let a short-term blip in the UK impact our business in long term.

In short order, we've already gotten up dusted our shelves off and put up sales of $854 million in Q3.

For the next 60 days, look for new features in our Web site and look for new rollout of a brand and global market strategy that changes our focus from being not just a product provider to a product and a solution provider.

I'm not going to say we don't have challenges and issues that didn't resolved.

But we have our arm securely around these issues and we've a plan in every area.

Now that I have discussed the centers for UK operations of the Comark integration, which we believed that have been the two largest issues concerning the market, I'll turn the call back to Stan for some comments about our financials and various operating statistics.

Then I'll come back again to discuss the ministry and economic dynamics and give you some guidance on what you can expect in the future -- Stan.

Thanks Tim.

As we've stated before, Insight Enterprises is a holding company with two operating segments.

The direct marketing segments refer to as Insight and the business processing outsourcing segment referred to as direct alliance.

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 were normally only provided at the operating level.

Additionally, since some areas at our Chicago based corporate sales operations have already been integrated with other Insight operations it is not possible to give comparable financial information with that of Comark Inc., which we acquired in April of 2002.

Having said that overall net sales increased 74% compared to the third quarter of 2001 due to acquisitions and additional software sales resulting from the Microsoft July 31st deadline for its upgrade programs.

The net sales contributed by acquisitions and additional software sales this quarter are offset partially by a continuing sluggish economy and decreases in average selling price of other products.

Without acquisitions and the additional software sales, we estimate that net sales would be down slightly from prior year.

Sales at Insight, our direct marketing operations, increased 79% over the third quarter of 2001 while Direct Alliance, our outsourcing operations decreased 9% from the third quarter of 2001.

To specifically address the Microsoft upgrade program briefly, we did see an increase in revenue in Q3 2002 of Microsoft licenses due to the July 31st upgrade deadline; although the July surge in software sales was primarily in the SMB customer segment, as most larger corporate customers had already made the decision whether or not to upgrade prior to July.

Net sales of software in Q3 were 20% of total net sales compared to 16% last quarter.

Although we do anticipate a decline in software sales in Q4, we expect software to continue to be a strong product category and continued sales of not only Microsoft products but also in other popular software categories, such as anti-virus and security.

Additionally, many of our customers stated that budgets were shifted from hardware to software due to the Microsoft deadline.

So it is difficult to truly gauge the incremental impacts of Microsoft on this quarter.

With regard to our sales force, the number of account executive is down 323 or 14% from last quarter due to natural attrition, and integration plans in North America and a reduction in face-to-face sales executives in the UK.

We continue to increase our training and employee retention efforts and the average tenure of an Insight account executive as of September 30th 2002 was 2.4 years compared to 1.5 years at September 30th 2001.

Additionally, only 49% of our sales executives had less than two years' experience, 18% have two to three, and 33% of our sales executives have an excess of three years' experience.

This is compared to 74%, 10 and 16, respectively, a year ago.

Keep in mind that sales productivity increases dramatically within experience and we see that our initiatives to increase retention are paying off.

During Q3 2002, unassisted Web sales accounted for 7.6% of sales compared to 11.8% in the prior year.

The decrease is due to the addition of the corporate sales business acquired in April 2002, which currently does not have unassisted Web sales.

Excluding corporate sales acquired in April, unassisted Web sales have increased over prior year.

Turning to Direct Alliance, it recorded a 9% decrease in net sales from a year ago with net sales of 24.8 million in the third quarter compared to 27.2 million in the third quarter of 2001.

Now turning to gross profits.

The company saw a decrease in overall gross profit as a percentage of net sales from 11.2% in the third quarter of 2001 to 11.8% in the second quarter of 2002 to 11% in Q3 2002.

Insight's gross profit as a percentage of sales was 10.7% in Q3 2002 as compared to 10.5 in Q3 2001.

Direct Alliance gross profit as a percentage of sales was 21% in Q3 2002 compared to 22% in Q3 2001.

The overall decrease in gross profit percentage from prior year was due to lower gross margins from large corporate customers and some reductions in supplier reimbursements.

These decreases were offset by increased product margins from the small-to-medium sized business customers as well as net revenue recognition of certain software assurance products.

The net revenue reporting of certain software products resulted in an increase in gross profit percentage, up 0.7% compared to an increase of 0.45% in Q2 2002.

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

Third quarter 2002 operating expenses as a percentage of net sales increased to 8.8% from 8.4% in Q3 2001 and 8.7% in Q2 2002.

The increase from Q3 2001 was due to the inclusion of operating expenses for newly acquired and newly developed entities.

The increase from Q2 2002 was due primarily to abnormally high operating cost and severance cost of $1.5 million in the UK as well as the increase in depreciation at Direct Alliance.

Looking at the balance sheet, we ended the quarter with 158 million in working capital compared to 160 million at December 31, 2001.

Accounts receivable totaled $424 million as compared to $297 million at December 31, 2001.

Day sales outstanding in ending the accounts receivable were 45 days at September 30th 2002 as compared to 48 days September 30th 2001 and 50 at June 30th 2002.

The improvement in DSOs is due to a concentrated effort to reduce DSOs in a larger than normal percentage of sales in the first month of the quarter rather than the third month.

Inventory levels were 79 million at June 30th 2002 as compared to 34 million at December 31st 2001.

Annualized inventory turns were 44 times in our third quarter as compared to 90 times in the our third quarter of 2001.

The increase in the inventory and corresponding decrease in inventory turns is due to our recent acquisitions, which initiate very few drop shipments and an increase in opportunistic inventory purchases.

The outstanding balance on our lines of credit as of September 30th was approximately 99 million.

It should be pointed out that as of today this is already been paid down to approximately 69 million, and we will continue to work that number down over time.

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

Now, we will provide guidance for Q4 2002.

We expect consolidated net sales for the fourth quarter of 2002 to be between 800 million and 850 million and diluted earnings per share to be between 20 cents and 26 cents.

We continue to be cautious about the economy and expect continued pressure on gross margins.

Reductions in operating expenses in Insight's UK operations will be offset partially by increases in expenses related to stay (ph) bonuses for staff based in our Chicago operation.

Our goodwill balance of 188.7 million as of September 30th 2002 is in the direct marketing segment.

SFAS Number 142, which we adopted January 1, 2002, requires a goodwill and intangible assets with indefinite useful lives will no longer to be amortized, but instead be tested for impairment at least annually.

Goodwill was tested for impairment as of January 1, 2002, and resulted in no impairment of goodwill.

However, the annual impairment test will be performed in the fourth quarter, and given that the market price of our stock will be used as an indicator of fair market value of the direct marketing segment, it is possible that a non cash charge for impairment of goodwill will be recorded in the fourth quarter.

The guidance provided for diluted earnings per share of 20 to 26 cents excludes any potential non cash impairment charge.

I will now turn the call back to Tim for final comments.

Thanks, Stan.

Now, that you've been given financial guidance for Q4, let me address some of the issues taking place in the industry and how we are positioned to respond.

CUW continues to execute flawlessly.

Dell continues to grow share impressively.

We are not CUW and we are not Dell, but Insight continues to grow its business.

We have our own strategy that overlaps both CUW and Dell.

We're going to continue to focus on executing our plans.

We are going to continue to move forward towards being more of a solution provider for those customers that desire that value add from us.

This is what the Comark acquisition gives Insight in spades.

As I look out on the horizon, of course, I'm concerned about everything;

Dell, CUW, manufacturers going direct, et cetera.

But right now, Insight holds its own future in its hands.

Many challenges and opportunities in the next year or two are internal, and those are the things we can control.

There's been a great deal of press and speculation surrounding the HP-Compaq merger and HP's competitive presence in the direct channel.

HP is rolling out programs that change the terms and conditions for supplier funds and lower price protection periods.

However, as one of HP's largest resellers, we believe that the ongoing relationship between HP and Insight is extremely strong and will continue to be one that is mutually beneficial and allows both of us to effectively compete with Dell.

Almost every major manufacturer has openly said that IT demand remains weak.

We do continue to see pressure in the corporate space as customers continue to tighten their budgets, and we'll continue to be conservative with our guidance under the assumption that demand will not pick up materially in the next couple of quarters.

However, we remain optimistic.

Despite the current and foreseeable economic conditions, we still have the opportunity, longer term, to improve EPS through cost reductions and synergies on the operating line.

We will continue to expand our product selection and availability, and we are enhancing our service offerings through our custom configuration and integration capabilities.

Our ability to strengthen our existing customer relationships and our increased efforts in the large enterprise and public sector space will continue to boost our competitive position in the industry and bring even greater rewards once IT spending inevitably increases.

We are also very excited about the recent strengthening of our management team.

During the past few months, we had Bob Moya, as Executive Vice President and General Counsel;

Marsha Thompson in Public Sector; and Stuart Fenton in the United Kingdom.

So as a recap, I want to say that we are pleased that Q3 fell in line with our expectations.

We are continuing to be conservative in our short-term guidance faced with the uncertainty of when the economy and IT spending will begin its recovery.

However, we have tremendous opportunities to improve EPS through internal improvements, overall.

And we are extremely optimistic that our efforts to strengthen our management team on all fronts and the improvements we'll be making in our product and service offerings will continue to keep Insight moving onward and upward in the market with overall share and overall performance.

That concludes my comments.

Stan and I are now available to answer any questions that you might have.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Brian Alexander with Raymond James.

Thanks, good evening, and sorry.

I've been toggling back and forth between conference calls.

So if you touched on this, I apologize.

But can you just talk about gross margins for the Comark business.

I guess, you know, it went from 7% to 10% '00 to '01 and then, I think it went in the first quarter of '02 9.6, and I think you're still seeing some gross margin pressure there.

How should we think about gross margins in that business going forward?

Brian, this is Stan.

And we don't give the information as to, you know, specifically the gross margin at Comark.

In terms of the large business customer or the enterprise business customer, I think, we said earlier that it is lower than on the SMB side.

But we don't give any more specifics other than that.

So you can't even say, directionally, whether it's increasing or decreasing?

This is Tim.

On the larger corporate side, one of the interesting things that's happened is -- if you look at 2001, I mentioned in the conference call earlier, some of our largest customers actually bought less in 2002.

So -- but the good news is, we were able to go out and capture a lot of new business.

And each time you go out and capture new business, your initial gross margins are slightly depressed while you're doing that.

So that -- a little bit of gross margin is reflective of that process.

But, over time, you'll be able to increase those gross margins in those new customers.

Okay.

And then my second relates to your guidance.

You may have touched on this.

But, I guess, flat-to-down revenue sequentially, but EPS is slightly down to up.

So, I guess, should we think about the earnings picture as, you know, expenses coming down or gross margins going up to give you that earnings increase if sales decline?

Well, basically, Brian, what we said earlier was that we continue to think that there will be pressure on the gross margins.

And I think that that is really where the downward is coming on the expenses because of the stay bonuses for the staff in Chicago.

That will probably offset some decreases that you see in the UK.

So I think expenses could be relatively flat to maybe a little bit down.

So down on GP, flat-to-down on expenses.

And again as we said in the conference call, we're cautious about the economy, and that was taken into account in the guidance that we gave.

Okay.

Thank you.

Thanks.

Your next question comes from the line of Matt Sheerin with Thomas Weisel Partners.

Mr. Sheerin, your line is open.

We have no response from Mr. Sheerin.

Yes.

Hello.

Matt, how are you?

Yes.

Hey, guys.

If you could just talk concerning the gross margin, with Comark specifically, is that -- was that lower than you had anticipated given the pricing pressure and the competition out there for enterprise business?

And how do you see that going forward?

Are you looking at, for instance, turning away certain business in order to keep margins at a certain level?

We answered a little bit of that.

You must have followed me at the last question.

No, I'm sorry about that.

That's okay.

We answered a little bit of that.

But on that -- on -- to further clarify and add to that, one of things that we did is that we have definitely looked at a lot of bids right now and choosing whether or not to compete in those particular bids.

That said, in certain accounts, we're willing to (inaudible) account that business even at very low margins just to make sure that we hang on to that account.

So when they do start buying the larger quantities, we're in there for that business.

So we're probably more likely to like to hold the business as opposed to give it away at this point.

Okay.

Great.

Thank you.

Thanks.

Your next question comes from the line of David Manthey with Robert W. Baird.

Hey, guys.

I had a question for you on the revenues.

If you indicated that Comark is sequentially flattish and the UK is running at about 106 million, that would indicate that the core Insight business would be lower sequentially from 2Q to 3Q and down pretty significantly year-over-year.

Is that about what you're looking at?

I think you're just right (ph), David, and I think that's probably a right analysis.

Okay.

Can you discuss the magnitude and the expected duration of the stay bonuses?

Well, first of all, it's a little hard to discuss the magnitude.

I mean, I've got some, you know, hard numbers that I guess I can throw out there to give you at least a range.

In terms -- and let me talk in terms of the length of it.

Really, they will have to stay until we convert, okay, because if we're on the SAP system, you know, we need to have those people there.

So, consequently, the length of that will be somewhere probably between, like Tim said earlier, 12 to 18 months.

In terms of the dollar amount, you know, although, I have an idea of the dollar amount, it -- there is really many factors in this; and, I guess, I'd rather not say anything on that.

This is Tim.

And this is one of the interesting things, as we go on through this is that some people are getting and the some people aren't, and we want to be very careful with how we discuss this from internal and an external perspective.

With one of those things, we're -- there's significant cost going on.

As we duplicate things, we have excessive costs to the aggression.

So our SG&A has popped up arbitrarily high during the integration process.

Okay.

And Stan, just to pursue it a little further -- if everyone that you currently have on these stay bonus programs were to stay with the program until the end without anyone falling off between now and then, is that what you are recognizing in the P&L today or do you have some sort of an attrition factor in there also?

Yes, we do have an attrition factor built in, conservatively, okay, into that and it's not for all people in Chicago.

It's only really for the affected department, which would be primarily IT, which is, you know, because of the system change and also for the accounting department.

So it's really only related to those departments.

And yes, it would be over that period of time.

There is an attrition built in -- is conservatively built in.

Okay.

And on the question of the UK, is the -- you indicated that they're still losing money.

I think the number you gave was 2.9 million.

So the swing factor -- if you get that business to breakeven in the fourth quarter, it's either going to be the 2.9 million including the special charge for the current quarter or about 1.4 excluding the charge based on the 24 cents, is that right?

That's correct.

I think the number was 2.7 if I remember right.

I don't have it in front of me, but I think it was 2.7.

And that's correct and that includes the 1.5 of severance costs.

So you're right in your assumptions there.

Okay.

Thanks.

Your next question comes from the line of Stirling Levy with Morgan Stanley.

Hi Tim.

Hi Stan.

A couple of quick questions if I could.

The first is on the UK business.

I think you said the range for Q4 would be about 85 to 95 million, which is about a 15% sequential decline.

And I know you said that Q3 revenues in the UK were increased because of some of the one-time Microsoft benefits.

My question is if you exclude the one time benefits in Q3, are you looking for a normal sequential decline in Q4 from the UK business, or is this greater than normal sequential decline?

It's roughly flat if you exclude Microsoft out of that, which is obviously high volume and low margin revenue, in that regards.

The other one is more to reasons why we're being cautious in the UK is the way that Christmas and New Year's fall and the holidays in the UK this year.

We're just nervous that we're going to have a lack of sales days because of that in the UK also.

So we're being a little bit conservative on there too.

And certainly another thing to take into account is the foreign exchange.

You know, we (inaudible) this quarter.

About a third of that 17 (inaudible) due to a foreign exchange adjustment.

So, you know, those things are very difficult to predict.

Now, we're doing sales.

Now we're doing foreign exchange, and that's why the range was given like Tim did.

So you have to take all those things into account when you look at that which actually, I felt, was a pretty big effect on the $100 million business.

Okay.

My next question relates to the percentage of products you buy from distribution versus the percentage of products you buy direct from OEMs.

I know in your core North America Insight business, the percentage you buy through this distribution is quite high.

And I would guess it's higher than the Comark business and the percentage they bought from distribution.

Going forward, how do you look at that ratio?

Do you think it remains the same or does Comark migrate towards increased purchases through distribution or can you help us think through that?

Sure, this is Tim.

What we anticipate happening over a period of time is that for certain product SKUs, the high volume SKUs, while they actually to start buy more of that product direct on both sides of the house.

You are correct in that Comark has traditionally bought much more product direct.

But on the lower volume SKUs, the -- lets say the less than 50 or 100 run rate per month, they probably buy more of that through distribution.

But the net effect is that we will buy more from manufacturers direct as we go forward, not less.

And Stirling, just to put numbers around it, overall it was 44% -- was our direct shipment if I remember correctly, right around that level I believe...

No, overall it was higher than that.

It was 62% overall -- excuse me, 62% overall.

62% was direct ship, and I'm assuming that some OEMs may direct ship for you.

But a large majority of your direct shipments come from the distributors.

Correct.

That is correct.

Okay.

And as you migrate towards increasing purchases from the OEMs, I would guess that that would help expand your operating margins.

Yes, but the potential downside of that -- we think it obviously makes sense, which is why we're doing it.

But you know, even though you may get a nice pop in gross margin, you will have some increased SG&A associated with it.

So the net affect is you will increase your operating margin by doing it.

Okay.

Great.

And my last question if I could -- could you just give us an update, on the -- on your public sector progress?

We've been hearing from several of the direct marketers today that the public sector remains a bright spot, and I was just hoping you could provide us your progress?

We did pretty well in public sector.

But again, part of the issue there is we're more internally focused on integrating the two operations than externally.

So we probably didn't get as much of a pop indent we normally would have.

If you go back to what we talked about it in the last quarter, it's approximately $200 million to $250 million in combined sales annualized between the two operating entities.

So it's, you know, 7% of the overall business right now, which is not bad.

But it's not going to impact our overall results materially.

Great.

Thanks Tim.

Thanks Stan.

Thank you.

Our next question comes from the line of Walter Winnitski (ph) with First Albany.

Yes, thanks, Stan and Tim.

I've got two questions.

Let me take them one at a time.

First, on Europe; while there's a lot of cross currents that are taking place, do you get the sense that operations in UK have -- or demand in the UK has bottomed or is it still kind of trying to find a bottom here?

Well, I think that if you -- I'm just talking in aggregate.

We think it's somewhat bottomed, specifically, in regards to our company.

When I say that, we have taken off a little bit of the drive in the corporate space, we're continuing to service some of our larger group of customers that we already have in the business that's already flowing, but we're not actively pursuing large numbers of corporate customers right now.

I think that's where it's the weakest right now.

We think, in the SMB space, a little bit like the US, it's already kind of hit bottom; people buying just their needs.

No one is doing big rollouts or new investments.

So we think that the rate that we're at, the 85 to 95 as an example for guidance for Q4, non-Microsoft, still where it's going to stand for a while.

Okay, good.

My second question -- relative to the changes at HP, what's -- what have they done differently?

And how does that impact you and since there is a lot of discussion about gross margins coming down, was there some negative impact that you factored into gross margins because of that?

Well, when you look at HP, specifically, you know, you really don't know those folks are out integrating the Compaq and the HP businesses together and, you know, we see some potential negative gross margin in some areas.

We see bright spots in other areas.

So, it's one of those things where when we look at the business and we will plan for, we want to plan that -- obviously, that the worst-case scenario happens on that.

Again, we look at specifically, at what we do with HP products, and we think we add significant value above and beyond what HP can do direct, as an example; whether that be SMB or corporate as an example.

So, am I concerned about HP?

Absolutely, because a minor change to how they do things with us and CDW and everybody else can, you know, obviously, impact our overall business.

But when I view the overall relationship, I think that HP has been fairly clear that a portion of that business is going to go direct and a portion is going to go through guys like us through the channel, so to speak.

So, Tim, to follow up, you did mention that they decreased their price projection.

Were there any changes in the back end as to some of the season (inaudible) soft dollars or, you know, other things that they had been giving you?

They changed the structure of it.

Net, net, net, we think it's a little bit lower, but not materially.

The key thing is what they did was they changed the matrix or how we qualify for things, and actually we're not 100% sure that we might not actually get more.

But it's one of those things -- we're trying to go through the documentation right now to figure out exactly where we are at.

But in terms of the overall results of the company, it's not going to be material for the overall results, but it's really trying to figure out what direction does HP want to take us, as an example.

Lets say that they might have paid us the same to call it back into rebate dollars across all product categories.

Now, they may say we're going to pay you a little bit less for the PC, but I'll pay you more for the accessories that go with it.

Well, as long as we sell accessories in net, net, net, we'll still make the same or if not more back end dollars, so to speak.

You have to also partner this with the gross margins.

Some areas, they are cutting our back end dollars with increasing our gross margins.

But we do believe -- we expect to expect.

So it's very difficult at this point to figure out exactly what the net effect will be at the end of the quarter.

But these are not volume-related kind of changes like we saw in the old days, if you know what I mean.

No, no.

Yes - no, nothing that like.

Okay.

Thanks very much.

Your next question comes from the line of Brett Miller with AG Edwards.

Hi, everybody.

Hello.

Good job in a tough quarter.

Somebody already grabbed my public sector question.

What about Services?

I mean that's another organization with similar run rate that you guys are building out.

How's that going as far as leadership, integration, and spray that down, I guess, through the SMB Network.

That is probably the biggest area of potential upside for us.

We've already had a couple of big wins.

In fact, what I have talked on the call was actually an SMB win referred up to the corporate space.

In terms of the back end service capabilities, I think, this is probably, you know, I hate to say it, but I will call I the promised land for the SMB part of the business, is to be able to offer these value add services that really no one else can offer.

So we really started integrating in earnest in Q3 in that stuff, and then really in Q4 and Q1 looked for us to add significant capability to our SMB customers in the service space.

Can you give any color on what those types of things will be?

You know, initially, it'll be primarily advanced integration capabilities.

Also as an example, the value-add side of the business is Cisco gold authorized.

No direct marketer in Cisco gold authorized because they don't have the service capability, except for Comark.

So when you look at that, if a customer needs a high end router installed and serviced and configured, really Comark is the only solution provider that can offer that.

So these are the type of areas, as we're able offer that to all of our customer base, we think it is going to have significant impact for us longer haul.

Okay.

One more question.

You've talked about gross margins down a little bit in UK due to the Microsoft sales over there that were higher volumes than lower revenue.

That wasn't Software Sure then, was it, because that is traditionally done as a net margin?

Correct.

You are correct.

What products were those?

It was Microsoft licensing product, nonstop for assurance.

Okay.

There's a couple of different types.

That's more large enterprise focused?

Well, largely customer focused.

Okay.

The other one is that, I'm actually fairly optimistic about the UK gross margins going forward.

In terms of actually getting some upside in those gross margins.

Is there a push right now for people in the fourth quarter, larger corporate, to do more -- I know all the Software Sure has been focused more on the SMB.

But there is an awful lot of site -- you know, advanced site licenses up for bid, I think, right now in the fourth quarter.

Is that something that you're aggressively pursuing?

We pursue all that, although historically Comark has not been an active what is called a large account reseller, in terms of really going after that business aggressively.

One of the problems you have is, especially with the larger corporate customers -- yes, it might be a $15 million invoice at one point, and it's not really worth it from our perspective to go out and do that unless it allows us to hit our volume gauge or rebate gauge.

Or we're saying, hey, we can give you overall customer relationship.

So as the -- you know, once we get to the larger and larger customers Ford, General Motors, you know, those type of accounts, we probably are less likely to participate in those type of deals.

Now that said, Microsoft, we're still counting on a good quarter from Microsoft this quarter.

Will it be Q3, no, but it will still be a pretty good quarter for Microsoft.

Okay.

Thanks.

Thank you.

Your next question comes from the line of Chris Hussey with Goldman Sachs.

Good evening, gentlemen.

A couple of questions.

Stan, can you provide us with what Comark's sales were in the third quarter of 2001?

On third quarter of 2001, I think, they were pretty flat, but I -- offhand, no, I don't know that -- don't know that, Chris.

Is that something you'll be able to get for us?

I am trying to think if that's in the documents that have been already filed.

Yes.

But you're saying for the third quarter specifically.

Yes.

I mean, they had a billing in five and I don't believe it's been broken out by quarter.

So my reaction is no.

Okay.

You know, just looking at the numbers.

It seems as though, you know, relative to some of your competition that your market share is slipping in the US.

Is that your impression as well or is this just the product of, you know, losing a little bit of sales, as you integrate Comark?

This is Tim.

I think that relative to CDW, I think we definitely lost share in a couple of different areas; a little bit in the commercial space, but I think also was that they took tremendous share in the public sector space in -- over the last -- really, over last quarter, but all of the last nine months, so to speak.

When I look at our business across our top customers in SMB, as an example.

It's pretty flat.

We've lost a little bit of revenue in the very small customer base.

But overall, I think that the one guy who's taken share out there in all the areas is CDW.

Is there anything that you can do to counter it?

Do you get the sense that CDW is getting better treatment from the vendors than you guys?

I think they definitely are.

And I think that that's something -- that, obviously, due to the Comark acquisition and through the integration process that we want to not only reverse, but also, hopefully, highlight things that we can do that, as an example, CDW cannot do -- as an example.

So, I'm hoping that over the next couple of quarters, that we'll pull even with them at the very least and, hopefully, go ahead of them in some areas.

You know, the last question is a little bit technical.

You know, one of your competitors changed their accounting treatment today where they are no longer recognizing revenue at the point of shipment, rather at the point of receipt by the customer, citing a ruling from, I guess, the accounting powers that be on SAB 101.

Stan, is that something that you guys have had to explore?

Well, I -- first of all, Chris, I'm aware of the competitor's release.

I'm not aware of the details behind it.

And I think that's important to understand, you know, all of that in order to make an opinion.

We are very familiar with the SAB 101.

That would be the overwriting document in this, and we believe we recognize revenues in accordance with its guidelines.

Okay.

Great.

And then the last question, when you think of the revenues that you had in North America -- July, August, September -- is that something that you guys can share with us right here, you know, just sort of give us some confidence that the fourth quarter is not going to fall off.

I think that's what investors are concerned about.

Can we get a sense that September, you know, held up pretty well relative to July?

I think if you pull Microsoft out of the equation, it's a much more linear quarter.

Because this is a little bit different in that you popped a huge revenue boost because of Microsoft in late July and early August.

It actually had a reverse from what might happen, you know, to lesser extent.

But for the most part, our quarters go -- no, our months go up slightly sequentially but not, you know, you don't have a huge hockey stick, as an example, in the business.

I know there is some way I can calculate the Microsoft revenue once I get off the line, but can you guys just share with us, you know, what exactly was that huge boost from Microsoft if you had to quantify that dollar amount now?

Well, let me -- I know that CDW did not do it.

But let me go back and look at our numbers because there was a revenue boost in Microsoft, but, as an example, there is still going to be continued Microsoft revenue.

If you look, we broke, specifically, out software, so software went from 16% to 20%.

That's probably your best guide for knowing how much of a pop did we get in software revenue in Microsoft.

So, it went from 16% to 20%.

One of the interesting things we should point is that Comark, again, is not a strong reseller of software in general.

So, we didn't have a lot of a pop there at all.

They had some in the low end of the customer base, but not a huge percentage.

That's why our revenue didn't pop nearly as much, as an example, where CDW did, where the business is more primarily SMB-based customers, overall.

And Chris, again, I would repeat what we said earlier that many of our customers stated that the budgets they had were shifted from hardware to software due to the Microsoft deadline.

So that makes it very, very difficult to truly gauge what incremental impact Microsoft had on this quarter.

So you need to take that into account also.

By the end of 4Q '02, you know, you indicated Microsoft 70 basis point impact on 3Q '02 numbers.

Is it a simplified, you know, analysis just to say that we should take your gross margins down by 70 basis points for the fourth quarter?

No, I don't think that's a correct way to do.

First of all, it was -- it's not going to be all of that.

And if you go back to Q2, I think it was 45 basis points, you know, in kind of a normal environment.

So, I don't think that it's fair to take all that out, Chris.

Okay, so Q2 would -- is kind of a normal -- you weren't getting as much of an impact from Microsoft in Q2, or not a big impact from Microsoft in Q2?

I think that was more of a normalized thing than you would have certainly in Q3.

Okay, great.

Well, thanks guys.

I appreciate it.

Thank you.

Your next question comes from the line of Louis Touma with Boston Partners.

Hi.

Just a couple of questions.

Can you tell us what the operating cash flow was for the quarter?

No, we haven't gotten that far yet, to be honest with you.

You don't know what the operating cash flow was?

Not right yet.

Okay.

We have to consolidate everything, I mean, this is not a one corporation, you know, look at the balance sheet.

You have to get it from all the different industries and that takes a little bit of time, obviously, we'll have that for the Q.

Okay, do you have a cap ex number?

On going forward?

For the quarter?

No, not at this point.

Okay.

Can you -- just going back to the Microsoft, obviously, July was heavy because of the Microsoft.

Can you give us just a breakdown for each of the month's percentage of revenues?

You know July, August, September, what each month represented?

We didn't do that internally.

Again, it was -- across normal business, it was relatively consistent across the months and it was just with that blip in, again, late July and August that popped our revenue -- our percentage of software up.

Okay, and the Microsoft revenue is -- you said was low margin revenue, correct?

For the most part.

Okay.

So if that's going away that should be a plus for your margins there?

That is a reasonable assumption.

Okay.

And so, what are your -- what is your guidance for the margins going forward?

Well, we didn't give any specific -- what we've said is that -- you know, again, you look at this quarter and there is a lot of pressure on at this quarter, and we think there will be continued pressure and I think you can probably draw from that that probably margins, what we're anticipating in Q4 is to be somewhat flat.

Okay, so ex this, then there's actually negative -- if you take out the Microsoft effect?

What we are saying is you take out all the positives, all the negatives, we think it's roughly flat sequentially.

Okay.

Can you tell us how much of the revenues for the quarter was from the acquisition?

Really, we can't because it's been integrated in and what was the acquisition before, for example, they had a small to medium size business portion that has been integrated in now to the Insight portion, and so there is no apple to apple comparison.

One of the things we did talk about is that -- specifically in the corporate side is that we do not believe we've lost any significant revenue in that area -- so that -- if you want to look at that way also.

Okay, how many months was the -- did you have the acquisition in the second quarter?

Two months.

Two months.

Okay, so is that -- okay.

Okay, thank you.

Thank you.

Your next question comes from the line of Bruce Simpson with William Blair & Company.

Hi, Tim and Stan.

Hi Bruce.

Did you give us the specific number of gross margin in the European business, the UK business?

Stan - well, let me...

No, we did not first (ph).

Okay, but as a general statement, should we interrupt the sequential decline in gross margins as coming wholly or mostly from the UK rather than core North America?

It's a combination.

Let me say this.

The UK margins in Q4 will be up -- will be higher than the US gross margins and most likely up sequentially from Q3.

How is that for an answer?

So -- yes.

And the other thing, Bruce, take into account that Comark has been here for an entire quarter, not two months.

So that by itself is going to drive North American gross profit margin down because it was only in two months in Q2 versus Q3.

Does that help?

Sure.

And then I wonder if we can just, kind of, strip out some of the moving pieces and focus on the core business, sort of, going back to the spirit of Dave Manthey's question earlier in the call.

Is the message that you want to communicate that, basically, your core North American SMB revenues are trending flat quarter-over-quarter, both in the second and the third quarter, and that's pretty much implicit within your guidance for the fourth quarter?

That is -- that's exact.

I think when you look at it year-over-year, it's a difficult thing as the business has been changing, but if you look at it sequentially, I think that a flattish type of -- you want to call it guidance and a historical look is where we're at.

Okay.

Thanks for that.

And then the final thing just involves STACK (ph).

And it looked like there is a little bit of a deterioration in revenue there, and I also thought I noticed in the press release -- maybe for the first time -- some quantification of the customer concentration there.

Can you give us a comment on what that's all about?

What trends are involving there?

Thanks.

We talked about it a little bit also in the Q and in the press release.

No great surprises there, I think, that's a (inaudible) number.

We've had some large accounts there.

It was a weak quarter for a couple of those guys there.

And that's something I really do not want to go into specifics on Direct Alliance, specifically around customers.

The confidentiality factor is a huge issue there.

And so I really don't want to give any color on a specific customer at all.

But Bruce, on the reduction in sales, that came from a reduction in pass through sales, which are little or no gross profits.

The service business sales were basically flat.

So the reduction in revenue is really coming from a portion of the sales that, you know, in reality we only do as an accommodation to our clients.

And so the base service business, which I think is the one you need to concentrate on, remained relatively flat.

And just as a final thing and following up on that, how much of the total quarterly sales that you're posting now are in the base service versus those kinds of pass through?

If I remember, 90 -- here, I've got the percentage somewhere.

I think it's in your press release.

It's 91%.

Thanks a lot.

Yes, thank you.

Your next question comes from the line of Fred Warnmer (ph) with Cobalt Capital.

Yes, hi gentlemen.

I just wanted to ask about, in terms of the integration and potential cost saves coming from it, I just wanted you to go into a little more detail on that?

And I also just wanted to ask whether there's any way to look at software going forward in Q4 being, you know, what in relation to how it was in, let's say, Q2, something like that?

And lastly, just on, you know, whether you were assuming that there could be any step up or improvements in the UK operations, and you've touched on this so far to some degree, beginning in, let's say, the March quarter and beyond - like a few questions.

Okay.

Let me make sure I get them all going.

The first one is that I think we stand by our original estimations that we have, you know, significant cost savings that will be realized to the integration of Comark.

There's also significant margin improvement in some of the value add services between the two and the buying power.

So, you know, that's going to happen over a number of quarters as we continue to go.

Again, with a lot of that coming through when the IS system conversions are complete in aggregate; obviously, we'll make progress along the way, but really when it's complete is the key issue.

Your second one, I think was about software in Q4 versus Q2.

We're planning for, internally, roughly the same software business in Q2 as Q4, maybe a minor decrease in software in Q4 just to be conservative along those lines.

As far as the UK, I think that what you're going to see out of the UK in the last couple of quarters is really a focus on the profitability aspect of the business and really a focusing of the business around, as we said, the SMB customer and those group of customers that we service effectively today.

Now, we will hone the cost structure and have honed the cost structure around those.

We took out approximately 20% of the staff in the UK over this timeframe.

So, we think that we've got the business we focused.

We've got the capacity in line with revenues, and we've also taken out some of the other business processes and practices that we really run new initiatives or new customer bases and new ideas that we didn't believe could be actually, given in this environment as effectively, given what's happened in the last three or four months.

So I'm very bullish on getting the UK operating results up significantly over the next couple of quarters.

Great.

Thanks a lot.

I appreciate it.

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

Good afternoon, guys.

Good afternoon.

Tim, would you comment a little bit -- I'm just taking that a little further to Comark -- and just talk a little bit -- now that you've had it five or six months and with everything that's happened, as you say the last three to four months, has any expectations longer-term about the integration, about the synergies or what you expect out of Comark?

Has that model changed at all?

No, if any thing I think that I've garnered an increased appreciation for just how good the backend of Comark is and just how good they are at certain things.

That has (ph) an example, the manufacturer direct or even Dell could never accomplish what these guys do.

So if any thing, it's really - again, I've gotten a better appreciation for just how good the backend is at Comark, specifically.

And because of that, I think, that we're going to incorporate even more of those value-added services into the SMB business, specifically.

So, if anything, I've been pleasantly surprised.

I have also been pleasantly surprised with - again, I just said, if you look at the top customers, they are down significantly in revenue year-over-year, but they've gone out and acquired, I think, the last quarter was almost 300 new corporate accounts we brought in into the fall of last quarter, in Q3.

So they've been able to, you know, while holding the machine to get to go out and significantly grow the business with new customers.

That's where I said in my script, where if some of these customers that are really delaying purchase just come back, you know, we're looking for some great upside out of the equipment business, longer-term.

And if you follow that with talking about lost revenue, I mean, I originally think that we were talking about, what, maybe 10% of the business was inter-company or something like that?

Yes.

We did squeeze out some of the business between us on that.

Also, it was just as important as that Comark's division PCW also sold to folks like CDW, PC Connection, Malls, Zones, et cetera.

So we lost some of that revenue that was associated with that also.

Okay.

And last question.

Stan, if you look at the working capital side on DSOs, what do you think you can get that number to?

Well, I think, we -- as we said in the past, you know, our goal is to get it in the low 40s, and I think that that is a very realistic number and was that way a couple of years ago.

And I think we're getting toward it.

Although some of the good news this quarter is really -- it should be tempered because of the Microsoft issue, where we had some strong sales in the beginning of the quarter, which we were able to collect before quarter-end, which made the DSO a little bit better.

But having said that, there has been a concerted effort to lower that.

We'll continue to do that, and I think the low 40 days is where it should be.

All right.

Thanks guys.

Thank you.

Our next question comes from the line of Rob Amen (ph) with Founders Asset Management.

Yes.

Hi, guys.

Hello.

Just a question -- there's a lot of moving parts in gross margin now with software, kind of, not really normalized action, needed to be fix.

Comark, you know, aggressive pricing to retain customers.

What about, you know, very long term looking out, what's the model look like for gross margins?

Well, I...

A range.

Let met go back a little bit differently.

If you'd look back over the last three, four, five years, gross margin has come down fairly substantially over the last five years on a quarterly basis and really on an annualized basis.

But over last couple of years it's somewhat flattened.

So, I think that what happened is that we saw a significant pressure from the Buy.com's of the world and the dot-com guys that were giving away products below cost, but what you see there a lot let's say a year or two, is really gross margin has somewhat flattened and not just for ourselves, but really for everybody across the industry.

So, I think we've -- you know, I hate to say it, but I think we stabilized kind of at where we are at right now.

With the Comark in the middle of it we've got to obviously normalize that because traditionally there are much higher volumes on an order, but the lower margin still break profit dollars per order.

Well, more to like you said, Microsoft was a little bit an anomaly, big revenue, lower margin.

So, Q4 will probably be the first quarter where you get all Comark without Microsoft and all the business together to kind of give you a good benchmark going forward.

Okay.

And then that was normalized, I mean you're gross margin is going to be down three years in a row.

So I am just kind of figure out here should we be looking for like, you know, very long term when services start kicking in a mid elevens type gross margin?

Rob, this is Stan.

I think we've talked about this -- you know, there are a lot of moving parts when you take into service, when you take in the UK, which has a higher GP right now than it does in North America, when you take in large enterprise versus the SMP and that makes it very hard on that number.

But I think ideally what you would look at when you're modeling this out is gross margins somewhere between 11 and 11.5%.

And that's what Tim was basically saying is we probably are in that range now.

So I think that's where, if you had to look out in the future and with all the moving parts, it would probably be somewhere in that range.

Okay.

And then also, on operating margins looking, you know, much further out when things have stabilized and normalized, what kind of range would we look for there?

You know what, Rob - again, what we've said there it is that you look at operating expenses, and if you look at operating expenses anywhere, you know, between 7% and 7.5%, okay, then you come down to that operating profit, you know, of somewhere between 3.5%, 4% long-term.

I mean, that's certainly something that has been able achievable way in the past for us and certainly something that, we think, is doable going forward.

And I think when you're modeling out, that's how the kind of look at it -- 11 to 11.5 GP, 7, 7.5 in the operating margin.

And then or in the operating expenses, and then that gets you down to your operating profits.

Does that help?

Yes, sort of.

But you mentioned 3.5 to 4 there.

If I take the midpoints of both those guidances that you gave, that gets me to 4 as the midpoint.

So I would think the lower end is higher and the higher end would higher or maybe the expenses aren't really 7% to 7.5%.

And if you're saying should it be 4.5%?

Yes.

I just said 11 to 11.5 on gross margins.

So I take 11.25 minus 7.25, I guess, that gets me 4.

You know, you're right.

You're right, Rob -- and, again, you've known me for a while.

I'm always going to be conservative in the things.

I'd never say that's high.

But you're right.

When it comes, it becomes 3.5 to 4.5%.

Okay.

Thank you.

Your next question comes from the line of Greg Eisen with Safeco.

Hi.

Good afternoon.

I got on late, so forgive me, if you already addressed these issues before.

But now that you've now made a new president of UK operation, and I assume he's on the ground and off and running there.

Is there anyone from the headquarters office or from the US operation in general that is staying full time over in the UK to monitor the ongoing progress of the UK operation on a day-to-day basis?

It's a combination deal.

When I say that Paul Kent has been over there on the ground -- former managing director in UK in years past -- currently, you know, acting as a head of supply management for North America.

Now, he's on the ground over there.

Stuart is actually coming here this weekend, in fact, to spend several weeks with Insight on the ground in Tempe to really home down into the details of the model.

But one of things you've touched down right there is that we continue to want to have several ex-pats in the US.

Right now, we have three on the ground in Sheffield, specifically, from the US and one from Montreal, Canada and we will continue to have those folks there for the foreseeable future.

If I look down, let's say, December of '04 -- I'm sorry December of '03, those folks might come back, but the plan is to have them on ground for at least significant amount of time.

So things are at least smooth.

That's another way to say it.

Yes.

Okay.

If I could ask another question briefly.

Firstly, you have the headcount for the sales reps in the press release, but could you give us the company wide headcount, total employees in the third quarter versus the second quarter?

And then, can you describe how you'd expect that would change after the so-called stay period -- stay bonus period is over?

This is Tim.

Let me talk in broad numbers.

At the end -- at the first of the month of October, we had, approximately, 4,619 employees worldwide.

That's all divisions, Insight and also Direct Alliance, all divisions everywhere.

I would expect that through not only overlaps, efficiencies, headcounts, redundancies, just general attrition, et cetera, that assuming business does not pick up, that we would end up closer to 4,000 in 18 months, if you're looking about overall.

Okay.

That kind of answered my question.

Thank you very much.

Great, thank you.

Your next question comes from the line of Stirling Levy with Morgan Stanley.

Mr. Levy, your line is open.

It's been a long call, guys, so I will just follow-up with you afterwards.

Thanks.

I appreciate it.

Thank you.

At this time, there are no further questions.

Are there any closing remarks?

Yes.

Thanks on behalf of Insight Enterprises for your support.

To all Insight employees around the world, thank you for your hard work.

Keep the focus and keep on charging forward.

Thanks a lot.

Thank you for participating in today's Q3 2002 Insight Enterprises Earnings Conference Call.

You may now disconnect.