Insight Enterprises Inc (NSIT) 2002 Q4 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Insight Enterprises Q4 2002 earns conference call.

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

And 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'd like to withdraw your question, press the pound key.

Thank you.

Mr. Laybourne, you may begin your conference.

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

Today we will be discussing the company's earnings results for the quarter ended December 31, 2002.

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

If you do not have a copy of the earnings release that was posted this afternoon, you will find it on our Web site at Insight.com, under our investor relations section.

Since detailed financial and operating data are contained in the earnings release, we will only be concentrating on highlights of the quarter 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 being webcast live and can be accessed via the investor relations section of our Web site.

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

This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, January 30th, 2003.

This call is the property of Insight Enterprises, Inc.

Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Insight Enterprises, Inc., is strictly prohibited.

Finally, let me remind you about forward-looking statements that will be made on today's call.

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

These risks are discussed in today's earnings release and also in greater detail in our Q3 10-Q.

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

Tim?

Thank you, Stan.

Hello, everyone, and thank you for joining us.

As everyone is aware, the fourth quarter provided continuing challenges in the economy, both in North America and in the United Kingdom, and more specifically, in our industry, causing businesses to continue tightening capital spending budgets.

Specifically, the sales demand by small to mid-size businesses was softer than expected across the industry during the fourth quarter.

Although this placed a lot of pressure on our top-line sales numbers, we maintained our gross margin percentage and succeeded in reducing some of our operating expenses.

As a result, net sales for the fourth quarter of 2002 of 772 million were below our original guidance for net sales of 800 to 850 million, but our diluted earnings per share of 22 cents, excluding the goodwill impairment charge, fell in the mid-section of our original guidance for diluted earnings per share of 20 to 26 cents.

Later in the scripted portion of the conference call, Stan will address the specific results of our operations for each of our operating segments which you will notice we have broken out differently than we have done historically.

First, however, I would like to spend some time giving you an update on the business in general, and the progress we have made in the ongoing integration of the former co-Mark operations.

From an internal reporting standpoint, we have realigned responsibilities in Insight's North American operations so as to be operating together as one unified entity, with a single person responsible for the sales functions and a single person responsible for the supply chain and services functions.

Rather than having duplicate functions spread across several independent parts.

For example, prior to the re-alignment, each of our individual customer groups had a president overseeing both operations and sales.

Here is what our internal organizational structure looks like now.

Reporting directly to me are Tony Smith, Stan Laybourne, Bob Moya, and Lee Stratford (ph), the managing director of our internet service provider, plus net.

Tony Smith is president of Insight Enterprises, our holding company, and is primarily focusing on the integration of the former co-Mark operations with those of Insight North America.

Reporting to Tony are (inaudible), president of Insight North America, Stuart Fenton, manager director of Insight UK, who is responsible for all aspects of Insight's United Kingdom operations, and Mike rather, Chief Operating Officer of direct alliance. (inaudible), as president of Insight North America, is responsible for all aspects of our North American Insight business, and reporting to Dino are Tim McGrath, formerly co-Mark's president, who is now responsible for all of Insight's North American sales and marketing, and Joel (inaudible) who is responsible for all of Insight's North American supply chain and service operations.

Stan Laybourne, our Chief Financial Officer, supervises all financial aspects of the company, and all employees in the accounting, finance, and credit and collection areas report to him on a worldwide basis.

Finally, Bob Moya, our general counsel, is responsible for legal and regulatory aspects of the company.

We have a strong and improved organizational structure in place to lead the company going forward.

We are confident that simplifying the internal reporting structure, with specific management employee groups dedicated to the front and back ends in North America, will be a positive move that will bring the company together officially, to properly execute the short- and long-term growth strategies across all geographies and customer segments.

Now I will address the focus and performance of our North American sales Force.

Insight has exciting capabilities that we believe differentiate us from our competitors.

However, with any large acquisition, there is natural period of uncertainty, where employees are asking, "How does this affect me?"

This takes concentration away from sales, which is already tough given the current environment externally.

Fortunately, we have now over the hump, so to speak, of the internal uncertainty phase.

All employees know their status and are now able to focus externally on business.

From the management level, we are increasing our efforts on driving new marketing strategies for targeting customers based on where they fall in the marketing life cycle.

We have also physically integrated our Insight services people, those people selling various service offerings, and Insight global finance people, those people offering various financing opportunities to our customers, onto the main sales floors, so our current account executives now have better access to these resources to enhance cross-selling between products, services, and financial products.

With regard to our sales Force in North America, the number of account executives is down 153, or 8 percent from last quarter, due to performance-related metrics and integration plans in North America.

We continue to increase our training and employee retention efforts, and the average tenure of an Insight account executive in North America, as of December 31, 2002, was 2.7 years, compared to 2.0 years a year ago.

Additionally, only 41 percent of our account executives have less than two years experience. 20 percent have two to three years.

And 39 percent of our account executives have in excess of three years experience.

This is compared to 61, 16, and 23 percent, respectively, a year ago.

We plan to add net incremental between 200 and 400 additional account executives in North America during 2003, spanning corporate, SMB, and public sector additions.

This additions will be a combination of outbound account executives and face-to-face field personnel.

Last quarter, we stated that we would be enhancing features on our Web site.

We are pleased to announce that on December 6, we launched our now guided search engine.

This exciting new search technology will differentiate Insight from our competitors while simplifying the on-line ordering process for our customers by making it faster and easier to find the products that they need.

A detailed practice display page enables (inaudible) searches now default to best-selling and in-stock products to accelerate the buying on-line.

And dynamic breadcrumb trails allow customers to alter search criteria without starting over.

This new search engine is extremely powerful, and we believe it will greatly enhance our customers' experiences with our on-line research and purchasing through Insight.

On the subject of enhanced technology, we have stated before that a significant element of the co-Mark integration process is the move to one consolidated IS platform.

This is the point when most of the cost efficiencies of merging the two companies will ultimately be obtained.

We are working to enhance our overall IS systems to incorporate the function nationalities of both Insight's existing proprietary Mac system and co-Mark's SAP system to achieve a best of both worlds result.

I'll now give some color on how that process is going and what we can expect from our resulting system will look like on a go-forward basis.

From an account executive's and customer facing perspective, the ultimate consolidated system will enhance the functionality of the previous Mac's design.

We believe that Insight has always offered an extremely efficient order entry and e-commerce system with an interface that is unparalleled.

In other words, we'll be keeping the functionality that differentiates Insight from our competitors.

On the back end, we have determined that SAP is the best solution for inventory management, purchasing, warehouse, logistics, services, human resources, and accounting.

Probably the biggest advantage that SAP offers is that it is already being utilized for the majority of our inventory management and warehouse logistics business in North America.

The implementation of the new system will allow us to focus our go-forward internal (inaudible) on the front end customer experience while requiring less back-end programming.

The plan for the new system is to not only retain all the functionality currently available in our two separate systems necessary to provide proper service that our customer needs and desires, but also to add functionality that will enable us to exceed our customers' expectations and further differentiate us from our competitors.

So we are pleased with our analysis and our decision to move forward on the hybrid system we are referring to internally as "maximus."

The benefits we will see from the maximus system will be (a) a world-class integrated sales and support engine (b) an efficient, reliable, consistent system to support our business needs (c) a more robust reporting capability with more internal controls and analysis ability and (d) a significant increase in functionality from a sales perspective to exceed our customers' needs, wants, and desires.

It is important to note, however, that although we are currently running two separate systems, our go-to-market strategies today are unhindered.

We have provided tools and technology to allow all of our products and services to be provided across all customer segments today.

Operating with two systems, though, is inefficient in the long run, as it requires us to maintain separate functions, such as IS accounting and finance departments.

Rest assured -- rest assured that we will not convert to one system until it has been fully tested and is ready to go.

Our time frame for completing the system conversion is still in line with previously stated estimates of 12 to 18 months, which brings us to an anticipated completion currently at the end of 2003.

The new maximus system will be implemented only in Insight's United States operations initially.

The current plan is to eventually deploy the system in Canada and the U.K., but those detailed plans and time lines will not be completed until maximus is fully operational in the U.S.

Direct alliance will continue to operate its own proprietary system, which are Multilink what will, multi-currency transactional systems designed to meet the requirements of direct alliance's clients.

These systems which were originally based on Insight's Mac system will continue to be maintained by separate direct alliance programmers.

Stan will outline later additional expenses that will be incurred throughout 2003 until this conversion of the IS platform is complete.

With regard to other areas from which we expect to see cost savings through the integration, we have decided to close our Indianapolis distribution center effective March 31, 2003, and consolidate its inventory into our warehouse in Illinois.

We are confident that this will reduce costs and inefficiencies associated with maintaining two facilities.

We believe the Illinois facility has sufficient capacity to handle any increased inventory that might be needed to accommodate for Siebel changes in the industry, as well as opportunistic buys.

Later, Stan will outline additional expenses that will be incurred in Q1 '04 as a Q Q1 '03 as a result of this discussion.

Any final comments are related to brand building.

The Comark name no longer exists internally or externally as we execute our 2003 go to market strategy as one unified Force.

Going into 2003, we are proud to say that Insight is one of the largest technology solution providers in the world.

We can provide advanced technology services, complex integration, and a most extensive product selection in the industry.

Most importantly, Insight provides customers with a single source for technology products, services, integration, configuration, deployment, installation, and network design.

In order to communicate to customers these exciting factors that differentiate us from our competitors, we have hired an outside marketing group and PR group to assist with brand initiatives and to launch some traditional marketing campaigns, which will include some national advertising in 2003.

We plan on -- to spend approximately 10 to 15 million gross in 2003 on external marketing, including demand generation and overall brand building.

Insight North America now has advanced capabilities as we move our business from just being product fulfillment and start adding more services and solutions.

We will become much more of a total solutions provider.

We believe we must become more to our customers than just price, availability, and customer service if we are to grow and prosper in the future.

The co-Mark acquisition really jump-started this evolution towards becoming a total solutions provider.

Our strategy allows customer service that spans the continuum from fast delivery of competitively priced products to advanced IT solutions.

We believe our ability to offer (ph) more of the high end offerings to our small business customers will be a significant differentiator for us over the mid-to long term.

To touch briefly on the status of the U.K. operation, as we expected we have returned to approximately break-even operating performance in the fourth quarter of 2002.

In connection with Insight UK, we have hired a new very experienced vice president of sales.

We opened an impressive new call center in Sheffield and refocused our energies primarily on the SMB customer segment which in our U.K. operations includes public sector customers.

We expect to hire between 100 and 200 new account executives in 2003, net add, in the U.K.

And now that sales have stabilized, we will focus on the efficiencies of growing the business and operating results.

We are currently pleased to have Stuart Fenton in his new role as managing director and after one quarter at the helm, we feel he is properly applying the Insight model and we believe he will lead Insight U.K. back to profitability in Q1 2003.

Finally, since we are now breaking up plus net's financial information for clarity, I want to give a brief update on the operations.

For those of you that do not know, plus net is our internet service provider in the United Kingdom that we acquired as part of the acquisition of a direct marketer in the U.K. in 1998.

Plus net continues to deliver good financial results while operating in difficult times.

The big change going on today in the U.K.

ISP market is the migration of dial-up customers to broadband DSL.

Plus net is well-positioned to respond to this market shift.

We will continue to operate plus net as a stand-alone company and when the plan is right, we plan to maximize shareholder value through a sale, a spin-off or another type of transaction.

Now, I will turn the call back over to Stan Laybourne to give you details about our specific operating details for Q4 and to discuss some changes in our reportable segments.

Stan?

Thanks, Tim.

As Tim discussed earlier, we recently reorganized our internal reporting structure.

As a result of this revised internal reporting structure, an increased focus on geographic information to make investment decisions -- for example, the recent system decision in the United States -- and the investment community's request to receive additional information, we have determined that effective in the fourth quarter of 2002, we are now required to report certain financial information for the following four operating segments: Insight North America, Insight U.K., direct alliance, and plus net.

Prior to the fourth quarter of 2002, the results of Insight North America, Insight U.K., and plus net were included in one segment commonly referred to as "Insight."

Although plus net does not meet the materiality thresholds to be reported as a separate segment, we decided to break it out separately so that the information reported for Insight U.K. is only that resulting from the direct marketing operations.

As you may recall, in recent quarters we provided net sales and operating margin information on a consolidated United Kingdom basis, which included plus net.

We also completed our annual assessment of goodwill during the fourth quarter.

The company retained a third party to perform valuations of each reporting unit that had recorded goodwill.

The reporting units were determined to be the same as our operating units.

That is, Insight North America, Insight U.K., direct alliance, and plus net.

Each of the reporting units had recorded goodwill except direct alliance.

Based on results of the annual assessment, we recorded a non-cash goodwill impairment charge of $91.6 million, $88.4 million net of tax, which represented the entire goodwill balance recorded at Insight U.K.

The results of the annual assessment showed that the goodwill recorded at Insight North America and plus net was not impaired.

The write-down of goodwill in the U.K. was a result of our change in our reporting units, as well as the decrease in the United Kingdom financial operating results.

Having said that, I'd like to start my -- by discussing the results of operations for Insight North America.

Please note that we evaluate the performance of our operating segments based on earnings from operations before -- before non-reoccurring items.

Financial information that is discussed, excluding the effect of non-reoccurring items, will be referred to as adjusted.

Net sales increased 69 percent to $660 million from $392 million in the fourth quarter of 2001 due to the acquisition of co-Mark.

Excluding the sales obtained from co-Mark at acquisition, sales decreased from prior year due to a continuing sluggish economy resulting in tightening of corporate budgets.

Although the SMB market was softer this quarter, we believe based on information provided by our largest manufacturer that we did not lose market share in this space.

We are also pleased that despite a tough economy, our corporate division showed some strengthening in the fourth quarter.

During the fourth quarter, we were successful in being awarded two large contracts.

These contracts included the purchase of approximately $20 million of product which was completed in the fourth quarter of 2002, the warehousing of that product, and the deployment of the product to the customer's designated locations.

Additionally, we will be performing advanced custom imaging and configuration services on the majority of the product while it is being deployed, and will be paid a fee for doing so.

Although the product contracts were non-tangible (ph) with terms of net 30 from the date of inventory, were segregated in our warehouse and invoiced to the customer, and the warranty period begins on the date of the invoice, the transaction does not meet the revenue recognition criteria under generally accepted accounting principles.

GAAP states that the additional work, although under a separate agreement, dictates when the product can be recognized as a sale.

Although the inventory stays recorded on our balance sheet, we do not legally own this inventory.

We have classified this inventory on our balance sheet as inventory not available for sale.

Product mix in Insight North America has remained fairly consistent.

Software sales in Q4 went back to a more normal 14 percent, after the surge in software license sales last quarter due to Microsoft's July 31st upgrade deadline.

Desktop, notebooks, and servers increased from 29 percent in Q3 to 31 percent of our overall product mix for Insight.

Gross margin in North America as a percentage of net sales was 10.7 percent for the fourth quarter of 2002, as compared to 11 percent in the fourth quarter of 2001 and 10.4 percent last quarter.

Gross profit decreased compared to the prior year period due to the lower gross margins on sales obtained in the co-Mark acquisition, and some reductions in supplier reimbursements.

However, these decreases have been partially offset by net revenue reporting on certain software products, and focused internally -- initiatives to improve product gross margin.

For the fourth quarter of 2002, Insight North America's operating expenses were 8.7 percent of net sales compared to adjusted operating expenses of 8.2 percent in the same quarter 2001.

The increase in operating expenses as a percentage of sales from prior year is due primarily to investments made in the Insight services and Insight global finance groups, write-offs of certain software assets due to IT system integration decisions, stay bonuses for certain employees, and increased amortization.

These increases have been offset partially by reductions in headcounts based on performance-based metrics, and the initial integration of certain departments.

Additionally, operating expenses from an acquired company were historically lower as a percentage of sales.

Software write-offs and stay bonuses, primarily for finance and IT staff, totaling approximately $1.3 million and $700,000, respectively, were recorded during the fourth quarter of 2002.

Now turning to Insight U.K., net sales for Insight U.K. decreased 22 percent to 85 million from 109 million in the fourth quarter of 2001, due primarily to a weakened IT spending environment.

Product mix in Insight U.K. has remained fairly consistent.

Software sales are back to a more normal 17 percent of sales, after the surge in software license sales last quarter due to Microsoft's July 31st upgrade deadline.

Supplies are a strong category for Insight U.K., representing 12 percent of net sales for the fourth quarter.

Desktops, notebooks, and servers represent only about 27 percent of our overall product mix for Insight U.K.

Insight U.K.'s gross profit as a percentage of net sales was 13.1 percent in the fourth quarter 2002 as compared to 12.9 percent in the fourth quarter a year ago.

The increase in gross profit percentage over the prior year is due primarily to an increase in supplier reimbursements classified as a reduction of cost of goods sold and net revenue reporting on certain software.

For the fourth quarter of 2002, Insight U.K.'s adjusted operating expenses were 13.3 percent of net sales, compared to 11.6 percent in the same quarter 2001.

The increase in adjusted operating expenses as a percentage of net sales is primarily due to a reduction in supplier reimbursements associated with cooperative advertising, which are classified as a reduction to operating expenses.

Adjusted operating expenses actually decreased 11 percent, from 12.7 million to 11.3 million, due to cost-cutting measures taken in response to declining net sales.

And in an effort to focus resources primarily on the small to medium-sized business customer.

These decreases were partially offset by an increase in the provision for bad debts.

We are pleased that the U.K. showed improvement over last quarter, and posted an operating loss of only $191,000.

If plus net's earnings from operations are included, as they have been historically, we posted earnings from operations of $266,000, slightly better than the break-even as previously projected.

Direct alliance posted overall net sales of 22 million in the fourth quarter, a 17 percent decrease compared to 26 million in the fourth quarter of 2001.

The decline in net sales is due primarily to a reduction in freight services that direct alliance provides to its clients, and a decrease in pass-through product sales.

Pass-through product sales are done as an accommodation to direct alliance's clients, and are transacted at little or no gross margin.

For the fourth quarter of 2002, one outsourcing client accounted for approximately 66 percent of direct alliance's net sales, and the three largest clients accounted for approximately 93 percent of net sales.

Direct alliance's gross profit decreased 9 percent to 5.6 million for the fourth quarter of 2002, compared to 6.2 million for the fourth quarter of 2001.

The decline is related to an increase in expenses that are allocated to specific projects, and therefore included in cost of goods sold rather than operating expenses.

Operating expenses at direct alliance decreased 9 percent to 1.4 million for the fourth quarter of 2002 compared to 1.6 million for the fourth quarter of 2001.

The reduction in operating expenses was due to increases in expenses allocated to specific products and, therefore, included in cost of goods sold, as well as cost-cutting measures.

Plus net's net sales increased 115 percent to 5.2 million, compared to 2.4 million in the fourth quarter of 2001.

Plus net's gross profit as a percentage of net sales was 40.5 percent in the fourth quarter of 2002 as compared to 58 percent in the fourth quarter a year ago.

Plus net has experienced a shift in revenue streams as its customers shift from traditional dial-up to broadband internet access.

Although sales of broadband services are at a lower gross margin percentage, this transformation in the U.K. market is providing an increase in net sales and earnings from operations for plus net.

We expect this trend at plus net to continue.

For the fourth quarter of 2002, plus net's operating expenses were 31.8 percent of net sales, compared to 91.2 percent in the same quarter of 2001.

This decrease as a percentage of sales is due to a higher net sales and goodwill no longer amortized in accordance with SFAS no. 142.

Looking at the balance sheet, we ended the quarter with 173 million in working capital, compared to 160 million at December 31, 2001.

Accounts receivable totaled 401 million as compared to 297 million at December 31, 2001.

Days sales outstanding in ending accounts receivable were 47 days at December 31, 2002, compared to 52 days at December 31, 2001, and 48 days at September 30th, 2002.

Inventory levels, excluding inventory not available for sale, were 73 million at December 31, 2002, as compared to 34 million at December 31, 2001.

Annualized inventory turns, excluding inventory not available for sale, were 43 times in our fourth quarter, compared to 80 times in our fourth quarter of 2001.

The increase in inventory and corresponding decrease in inventory turns is due to the acquisition of co-Mark, an increase in opportunistic purchases, and changes in some manufacturers' programs which provide incentives to purchase inventory directly from manufacturers.

As I mentioned earlier, the $20 million of inventory not available for sale is due to products sold to two corporate customers which is awaiting customer requested advanced custom imaging and configuration work.

Cash flows from operations for the three months and year ended December 31, full year 2002, were 22.4 million and 75.3 million, respectively.

On December 31, 2002, we entered into new financing arrangements, replacing our two previous credit facilities.

The new financing arrangements include a $200 million accounts receivable securitization program, a $30 million revolving line of credit and a $40 million inventory financing facility.

The accounts receivable securitization program does not qualify for sales treatment under SFAS no. 140, and therefore all receivables remain on our balance sheet.

We were able to enter into the accounts receivable security program -- securitization program because of the quality of our accounts receivable portfolio, which affords us the opportunity to borrow at very attractive interest rates.

The interest rate on this debt at December 31, 2002, was 1.85 percent.

At December 31, 2002, the outstanding balance under the $200 million accounts receivable securitization program was $90 million, and 90 million was available under the program.

There were no outstanding balances under the $30 million revolving line of credit, and the $40 million inventory financing facility at December 31, 2002.

As of today, January 30th, 2003, we have approximately 63 million outstanding under our credit facilities, excluding amounts under the inventory facility that are included in accounts payable.

This gives you a recap for the quarter -- fourth quarter of 2002.

Now we will provide guidance for Q1, 2003.

We expect diluted earnings per share for the first quarter of 2003 to be between 20 cents and 26 cents, excluding expenses of approximately 3 million to $4 million related to accelerated depreciation of software that will not be utilized after the system conversion, and expenses related to the closure of the company's Indianapolis warehouse facility, both a result of the continuing integration plan.

Additionally, bonuses were not paid to the majority of the executives in the fourth quarter of 2002 and 2001.

If executive bonuses had been paid in the fourth quarter of 2002 based upon results of operations before the goodwill impairment charge of approximately $900,000 of additional expense would have been recorded.

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

Tim?

In 2002, we started the year with an internal theme, "change going the game," and we did.

Through acquisitions in the United States, Canada, and the U.K., we believe we have changed the landscape of our industry.

We grew Insight to the second largest IT reseller in the United States, and one of the largest resellers targeting the SMB market in the U.K.

As we launch into the new year, we're taking advantage of the investments we made.

We now have the strategy, people, and capabilities to make Insight the leading provider of computing products and services to business and public sector customers.

The combination of the broadest product line, advanced services, integration capabilities, and a vast array of financing options uniquely positions Insight to exceed our customers' needs.

Our business strategy sets us apart in a new category of IT reseller, particularly in the United States.

We are no longer just a direct marketer of IT products.

As I stated earlier, our strategy allows us to span a continuum from fast delivery of competitively priced product all the way to advanced IT solutions.

We continue to be cautious about when we will see a turnaround in IT spending but our ongoing efforts to reduce operating expenses and make internal improvements should produce rewards in the short run.

As we further deploy our enhanced capabilities across all customer bases, implement targeted marketing initiatives and increase brand awareness among business and public sector customers, we hope to see further improvements in sales and overall performance for 2003.

That concludes my comments.

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

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

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

Yes.

Thanks, and good afternoon.

Obviously lots of questions.

I guess the first one would be concerning your -- the integration of the systems with the -- the I T-Systems with co-Mark.

Tim, if I remember correctly, you had targeted, I guess, the summertime frame for that integration to be completed but now you're talking about the end of '03.

Is it going more slowly than expected?

Is it more complicated?

Or what's going on there?

No.

Maybe -- maybe we -- we didn't convey correctly or you misunderstood.

What we talked about last conference call, we said finish the integration in 12 to 18 months, so actually we're increasing the speed to the end of 2003.

So we're actually accelerating the process.

So we may be completed before that, but we're actually very much on track with the integration, and as I said, we're actually increasing the speed at which we're integrating on the IT platforms.

So I'm unbelievably happy with where we're at on the IT platforms right now.

Okay.

And then before that happens, what other sort of expense reductions do you expect, or any savings you expect from the warehouse consolidation and other things you've been doing before, you know, we get to the end of the year, before we see additional savings from the IT integration?

Matt, this is Stan, and basically what we've done is reflected that in our guidance that we gave you.

Okay.

Could you be more specific about, then, would we expect then SG&A to be -- to be lower in the -- in the March quarter?

I think as you -- as you proceed down the line, you'll see a gradual reduction in that.

A lot of it, obviously, depends on where sales are in -- in the entire mix, and -- but, again, in the -- in the total scheme, based upon the guidance coming in at 20 to 26 cents -- and that was basically where we were at this particular quarter -- I think that would all kind of, you know, be self-explanatory where we think the operating expense percentage, which would be basically the same in Q1.

To give some more color on that, there's two -- you have two opposing things right now, which is, one is that obviously SG&A will be trimmed as we move towards the final integration, but if you look, we're also going to be investing heavily in advertising, marketing, and also in hiring.

So that's why it's a little bit difficult on a time in each individual quarter to figure out exactly where it's going to be and give you specific guidance until we actually get a quarter-by-quarter basis.

Okay.

Then the follow-up with that, then, what -- what is sort of the ramp-up schedule for adding the salespeople?

Do you expect that, you know, the -- a few dozen a quarter or what's the timetable there?

We're going to hire as rapidly as we can physically find and train qualified people.

The good news about this environment that we're in right now is that there's lots of folks out there that -- that are ready to be hired in all markets.

So I would say there would probably be more front-end loaded, but that said, we haven't actually -- you know, we had a new class start this last Monday, but -- of I think a total of 20 individuals, and, you know, obviously we're planning more as rapidly as we can.

As we progress, we'll give you an update each quarter on where we're at.

The sooner we can hire, the better I would like it.

Just in general.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Bryan Alexander of Raymond James.

Thanks.

Just a couple questions, and thanks for all the great disclosures that you provided in the press release.

With respect to not providing sales guidance for the March quarter, I'm just kind of wondering: Has the environment worsened or what has changed such that you're not comfortable giving any range of sales guidance?

That's the first question and I'll wait for your answer and follow up.

Okay.

Brian, this is Stan.

First of all, let's take it from a company philosophy point of view.

We want all of our employees focused on gross profit dollars rather than sales.

And I think that's the first thing to keep in mind.

Now, additionally, obviously there's the uncertain economy.

But then there's also certain aspects of sales to large corporate customers that makes it challenging to predict sales.

Let me give you -- for example, in the large corporate space, transactions can affect net sales without generating a lot of gross profit.

Let me give you an example.

Let's say we participate in a $10 million rollout for a customer with custom configuration and advanced integration services with or without actually selling the product.

A product sale with a typically low gross margin of a large transaction could add substantially to the top line without contributing much to our bottom -- or to the gross margin.

However, if we perform just the integration configuration or rollout services, but do not sell the product, the net sales line would be substantially less but the gross margin and earnings would be similar.

So for customer service profitability reasons, we do not want to alter the terms and conditions of a contract to achieve top-line sales, and this really leads to where I started out, that instead, we really want our people to be focused on the gross profit dollars which translate into bottom-line performance.

This -- this is Tim.

You know, if you look at the overall -- if you call it the mood of the market, so to speak, or demand, it's really been relatively constant or not a substantial change from the last couple of quarters.

We saw a little bit of softness in SMB and a little bit of strength in corporate in Q4, but, you know, when you look across from a high level, demand really hasn't changed much, hasn't got a lot worse but hasn't got a lot better either.

That's kind of what we're predicting, in overall demand going forward.

Okay.

Thanks.

And just a couple of follow-ups.

On gross margins in North America, you were able to keep those flat sequentially despite the fact that you were no longer able to benefit from the Microsoft program in the fourth quarter, so I'm just kind of wondering if you could give a little bit of color on the gross margin strength in North America, and I think you also mentioned in your press release that you're still recording some software sales on a net revenue basis.

Can you kind of clarify that for us?

And then finally, it looks like there's some software associated expenses that you're not including in your earnings guidance for the first quarter, yet you did have some software write-offs, I think, in the fourth quarter that were included, so I'm just wondering the difference between those two.

Brian, let me try to remember all these.

I'm old, so bear with me if I forget some of them.

First of all, on the gross profit percentage up sequentially in North America, it -- and that's based from the last quarter.

It's due to basically four things.

First of all, stabilization of product gross margins.

Two, lower amounts of software assurance products that were recorded as net revenues.

Three, the decreased in the software licenses as a percentage of sales.

And if you recall, those had lower gross profit percentage than the average.

And then finally, an increase in service revenue which we've been trying to gear up in Insight services which had higher gross margin percentages.

So those are the reasons why we were able to do so well from the gross margin point of view.

Your second question, in terms -- can I give any color in terms of the percentage of -- of software netted, and we just don't give out that information so that's a relatively short answer.

And then the third one -- I can't remember what your third one was, Brian.

I guess it looks like you had some software related ...

Oh, yeah.

... write-offs.

Yes, yes.

... in the quarter, which are included in your results, but in the first quarter, it looks like you're having other software related expenses that are not included in your guidance.

Right.

Thanks, Brian.

Yeah, there's a couple of things.

First of all, in our guidance for the first quarter, we said three to four million dollars, if I remember correctly, were for the software write-offs in connection with our decision of the IT platform, and also for the Indy closure.

It's basically half and half, okay?

Split between those.

So that you can kind of have that going forward.

Obviously, the software would -- would continue on for the balance of 2003, whereas the Indy closures would not.

In terms of the fourth quarter, we did write off a million three of software in fourth quarter, and that's because under generally accepted accounting principles, we have to look at software packages that we have, and if we are no longer utilizing them, we should write them off immediately.

In that case, there were a couple -- as a result of the system conversion -- that we were no longer definitely not going to use, so we took that hit in Q4, and that's why I outlined that as a million three in the North American operations, so you can handle that however you wanted to.

Okay.

One final question related to management ...

Brian, excuse me.

One thing.

I know you know this, but let me just at least mention that all those write-offs are non-cash.

You understand that.

Yeah.

Go ahead.

On management compensation, I think there's a bonus that you're eligible for every quarter based on how net earnings is performing versus a trailing four-quarter average and I'm wondering, would the goodwill impairment charge be included in that four-quarter average for comparison purposes going forward?

Yes.

Thanks.

Hey, Brian, that was a quick answer.

Yes.

Okay.

Thank you.

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

Hi, guys.

A few questions, if I could.

First, if you can help me think through this -- the impact that co-Mark is having on the Insight direct operating margin.

If I do some math, it looks like Insight direct North America in Q1 of '02 operated at a 3.18 percent operating margin, and in Q4, it looks like Insight direct North America operated at a 1.76 operating margin.

Now, I know you're not breaking out co-Mark anymore, but my question is: In 2001, co-Mark had a 3 percent operating margin but in 2000 it had a 1.3 operating margin.

Is part of the -- is part of the pressure we're seeing on the operating margin a compression of co-Mark's margin back to that 1.3 rate?

Well, this is Tim.

I mean, there's no doubt that 2001, where they had a much -- where co-Mark historically had a higher operating margin was a great year for them for a variety of reasons.

That was not an historical average.

But also, if you look at the SG&A number that co-Mark had historically, and Insight had, obviously we're higher than both of that from a year ago, specifically.

And a lot of that is due to the integration and additional costs that are being run through the P&L on a regular basis.

So when you look at our operating margin today, let's say, versus a year ago, part of it is that -- if you want to call it the corporate business has somewhat normalized to historical margins on an operating basis, but a lot of it also is just the shear increase in SG&A while we're integrating the companies.

That's where I think when you're all done the SG&A will normalize back downward, if that helps you.

Does that make sense?

It does.

So I mean there is -- it feels like that the co-Mark operating margin is compressing.

It may not be all the way down to the 1.3 level, but it is definitely off that 3 percent level.

Could you give maybe some -- some color on how close it is to 1.3?

Well, let me -- you probably won't like the answer on this, but let me say: You know, as we stated before, co-Mark as a company, or even a division, no longer exists.

You know, although the system conversion hasn't been completed, we've integrated the company along customer types and support staff, and all of the large corporate customers, SMB, public sector groups have been consolidated into respective divisions.

And likewise, all the soft -- support functions, although still using two separate systems, are consolidated from a report structure perspective.

So I guess what I'm getting at is, I can't break out what co-Mark is today because it's all over the map.

We don't follow it that way.

We don't track it that way.

And so therefore, we don't have the numbers to -- to give you on that information.

One of the things, if you look back historically, 20 or 25 percent of what you would call Insight's traditional sales pre-co-Mark was what you would term corporate customers.

So -- and the same thing is -- a piece of co-Mark's business historically is what you would call an SMB.

We've shuffled those accounts, and some of those accounts were duplicate between.

And we did it based upon relationship, who had the stronger relationship, where we thought it would be, where we thought it made sense strategically long-term.

This is why it's so difficult to go out there and -- we'd be shooting from the hip, so that's why we're trying to get general tendencies.

In general, we felt as if corporate was stronger and SMB was weaker but if we had to go out and break out by customer segment, it wouldn't necessarily be a co-Mark historical or an Insight thing.

It would really be a customer segment basis.

Sure.

Understood.

Thank you.

One more question, if I could.

Can you help us think about DAC?

I think you commented that three of the -- the three largest customers accounted for 93 percent of revenue and I think the largest customer accounted for 60-plus percent.

What sort of contracts do you have in place with these three large customers?

Is there any potential that this business could grow going forward?

And what are the risks that this business could shrink going forward because it has become, from a net income basis, an increasing larger part of your business?

Thank you.

A couple different -- a couple different things there.

Obviously, it's a good news/bad news.

When you have some large clients in that particular business, you do have concentration.

The other side of it is, obviously, it's very easy for us to focus on those accounts and be very -- very good with them and in deep, so to speak.

We try to have as many long-term multi-year contracts as we can.

That said, even if you have that, if a partner decides they don't want to do business with you because you're not performing, you know, they obviously can get out of contracts, et cetera, or just stop doing business with you.

In general, I like where DAC is going, and I will tell you that we are continuing to be very, very focused on growing the DAC business in general.

We think we're one of the few guys out there that has a Multilink what will, multi-currency cross-platform ability in multiple countries.

We're currently doing that in many countries in Europe and also in Asia, double-byte characters right now for some of our clients, so I think that we have a great capability there.

The good news/bad news is that Dick Staub DAC (ph) is purchasing very, very well.

The issue you have I think is concentration.

But as we feign (inaudible) assuming it just stays where it is right now will be significantly less as a portion of income as we take costs out through the integration, longer term.

In my mind, it kind of is what it is, the good and the bad.

Understood.

Thank you, guys.

Thank you.

Your next question comes from the line of Rob Damron of SWS Securities.

Hi.

Just a couple questions.

First, could you just give us the -- the co-Mark revenue in Q4 of last year?

It was -- I'm hesitating here because I don't have that in front of me, but we -- we basically have told before that it was roughly a billion five divided by four, okay?

So ...

All right.

So there was no seasonality to that billion five?

There really wasn't much, so, you know, 375 or somewhere in that range, would be it.

Okay.

And then unrelated question.

Regarding the HP channel initiative, how that's impacting the company either there a positive perspective or a negative perspective.

When it first rolled out -- I'm one of those guys that anytime things change, I get nervous, and at first I was very, very nervous, although, you know, in -- in hindsight, I think that -- I think that we were wise, obviously, to focus on it.

But we really haven't seen a material change.

I think the good news is that HP specifically really believes in the partnership between Insight and CW, specifically, out there in initiatives against Dell.

So I think both of us have been warmly embraced by HP on initiatives against Dell, and that's really who we focus on is our long-term competitor, which is Dell, so in a lot of this, HP is really going after us and CW to embrace us, specifically in the small to mid-size business.

So I wouldn't say it's a non-issue.

I think it's a change issue for us, but, again, materially it really has no impact on us from actual program changes.

You know, I might add to that also that although there are incentives to purchase directly from HP, we're still purchasing a lot of product through distribution depending on the customer service requirements, and the balance of the inventory that we have available for sale has not increased from last quarter for that particular vendor.

Okay.

Thank you.

Thank you.

Again, if you would like to ask a question, please press star, then the number 1, on your telephone keypad.

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

Hi, guys.

I was just wondering, this net 300 to 600 account executives for the full year worldwide, strategically I understand where you're going with that, but given all the things that are -- are happening with the company as relates to co-Mark integration and U.K. integration, et cetera, is this really a good idea right now to be ramping up the sales Force?

If you look at what we did, we actually took the sales Force down over the last six months.

Specifically related to the issues that you're talking about.

Pull back up to 80,000 feet.

Except for the IS platform and the associated operational changes with that, we are pretty much through the integration.

When I say that, our organizational structure, our policies, procedures, our offerings, all those are basically laid out and in line right now.

So we believe that we have excellent control of the business right now, and now is the time to start investing.

The hard part to figure out is -- again, is based upon quality of hires, people, availability, et cetera.

How fast we can actually bring them on.

So each quarter, we'll kind of give you the update.

You know, but again, when I sit and look at the business right now, you know, we have made significant progress on the integration.

Really the big hole right now is IS platforms.

But, again, it's not like the customers are seeing any difference to the service levels.

That's one of the biggest things we've focused on is absolutely, positively not impacting customers negatively with service levels by slamming the IS systems together too quickly.

So now, as an example, we've got the new structure in place and I really believe that we can grow the business aggressively this year.

Okay.

I think that the -- the question that many people had years ago with -- with the productivity of Insight's sales Force admin (ph) I should as you reduced the size of the sales Force, which I think was a good idea, and the productivity came up.

Now if you're adding people again, just wondering, does it not make sense to try to increase the productivity of the people you have, rather than going out and hiring more people and getting back into a situation where your productivity is low, maybe the turnover is higher, and you're losing touch with your customers?

Well, two -- a couple different things there.

Number one is that we think you should do both.

Number one is increase productivity and there's tremendous efforts going on internally, a ton of operational things going on to do just that.

Additionally, we calculate sales reps a little bit differently than, as an example, CW or our competitors do.

If we use the same calculations that, as an example, that a CW would do, we might have 20 or 25 percent less sales reps than CW does.

It's hard to tell exactly how they do their calculations.

It might be as little as 15 percent less.

But we actually -- we include more people as sales reps than I think CW does.

Let me emphasize -- let me go a little bit further on that, Dave.

This is Stan.

A couple things.

For example, in training, when our reps are in training, we still count them as reps and continue them in our calculations of rep productivity.

In cases where there may be a quota-carrying rep but that rep has assistants assisting that rep, we will count not only the quota-carrying but also the assistants in connection with that.

And my whole being is again, one of apples to apples comparison.

I think it's very hard to do.

At least that's what I've found out.

I agree with what Tim said.

I think we need to grow and get bigger.

I think that's an imperative thing in the long run for the company.

We need to do both things.

We need to increase productivity and we need to increase our account reps to get more -- more breadth and span, and I think we have spent the last six to nine months going through some very difficult changes with the integration that now are behind us with the exception, as time said, of -- of the IS and finishing up from that point.

But we really have accomplished a great deal in the last six to nine months, which will allow a certain portion of our people now to go back to focusing on growing the business.

Okay.

And then let's switch over to the IT system.

Now, I understand the -- that you're upgrading Macs to the new system, this maximus, or whatever you're calling it, and I was unaware that you were keeping some parts of SAP.

What does that mean for costs going forward?

These stay-on bonuses, I thought, were for people who were conversant in SAP and does that mean that you'll need to keep some of those longer term, rather than get rid of them?

Well, a couple things.

First of all, currently, today -- or I should say traditionally, Insight, as you've noted from pre-co-Mark, we were on an or cull based, as a result, HR and financial package, so this is, you know, really just switching from Oracle to SAP, as an example, from that perspective.

The core IS and IT is going to be based in Phoenix, so I think that's a little bit different.

Where we have SAP experts in Chicago?

Absolutely.

But our Primary Focus, long-term, is going to be in Phoenix.

Hence, the stay bonuses.

And, Dave, this is Stan.

You know, we expect the total cost of this IT conversion to be approximately 12 to $14 million, the majority of which will be capitalized, and keep in mind that on this shortening of depreciation over the next four quarters, we will be eliminating approximately $6 million of software that will not be used after the conversion.

So you need to take that into account in your analysis also.

Hopefully that helps.

That was that 1.5 million a quarter of basically IT non-cash charge for the next four quarters.

Okay.

And the stay-on bonuses, this 700,000, is that more or less than it has been in other quarters this year, and could you talk about what you think it will be in -- in '03?

It -- this is Stan.

It's up a little bit from what it has been in the past.

I think in '03, it -- it's very hard.

In our guidance, we've sure taken that into account at roughly about the same level.

Beyond that, we really have to go on a quarter-by-quarter basis, because that is -- it hasn't been paid.

It is an amount that could be, and most likely will be payable, but, again, the final determined amount won't be known until probably December.

But isn't that an accrual item, rather than an expense item?

It's an accrual that goes -- as you accrue it, it goes into expense.

And I think what you're getting at is it should increase.

It should only decrease.

That's correct.

Right.

Okay.

Final question, then.

If you could give us an update on the status of these shareholder lawsuits and give us an idea of when we might expect Insight to repurchase stock.

Okay, well first of all on the lawsuits there's really nothing to mention any (inaudible) in that at this particular point.

It - you may have seen that in other companies that this is a long, drawn out process.

In terms of the stock buyback, given the level of recurrent stock, we continue to evaluate the possibility of a stock buyback, but as a general rule, we really prefer to borrow cash to repurchase stock, and I think that's kind of a statement.

But, you know, given the level of our current stock price, it would be unfair to say that we aren't evaluating that.

Especially given our - just the cash flow position that we're in right now from the point of view of last year and last quarter, obviously we had significant positive cash flow, both for the year and for the quarter.

Okay.

Thank you.

Thank you.

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

Sorry, gentleman, to carry this thing over one hour but very quickly, on co-Mark, it would appear as though, you know, revenue on a combined basis at co-Mark and Insight, if you combined the two for 4Q '01, down significantly in 4Q '2, and if co-Mark, if a large corporate customer was doing okay in 4Q '02, that sort of implies your SMB client was dropping off very sharply.

Is that accurate?

One of the things you have to go back and look back on it, when we first acquired co-Mark, there was several hundred million of revenue and also just general revenue we're talking about that we necessarily didn't want.

It was -- let's call it either unique customers that we didn't want to do business with or it was also business, as an example, that co-Mark was doing with Insight or Insight was doing with co-Mark and/or business that co-Mark specifically was doing to PC connection, CW, et cetera.

So there was some revenue loss associated with that.

As you look at the business just on an overall basis, if I -- you know, that's kind of from our gut.

Corporate business was stronger, and S&B (ph) business was weaker.

But I think to go stronger language than that would not be accurate.

Well, Tim could you maybe tell us how much of that 1.5 billion of co-Mark revenue do you think you've retained?

This is the problem is here's -- and let me say specifically in a couple of accounts.

As an example, Citibank, both were big customers of Insight and Comark, number one and number two suppliers in one of their divisions.

As an example, we chose strategically to move the business out of our traditional SMB's reps hands and move it into a hundred percent the corporate reps hands, which, as an example, was the co-Mark version of it.

So now do you calculate that as a co-Mark sale, an Insight sale, or somewhere in between?

This is why we're so hesitant to give the numbers specifically so because we don't know what numbers are.

There's a hundred cases just like this that are all, you know, millions of dollars.

This is why it's very difficult to go out there and say, "Where is the business at" or where it's not at, based upon looking backwards.

Well, then two more questions, then.

How, as investors, can we gauge the success of acquisitions you make, given that policy?

And, two, you know, given your -- the expansion policy, maybe you could just elaborate a little bit more, a follow-up question that you already had, I know, but a little bit more about what you're seeing in the marketplace that would drive you to want to expand your sales force today, regardless of, you know, where you are on your restructuring platform.

But, you know, just what you're seeing in the marketplace, I want you to expand.

We think, specifically, that -- that the co-Mark acquisition jumped us well ahead in the solutions area, the services area.

We're already seeing wins -- and that's a little bit of the gross margin that Stan mentioned going up, we're adding significantly more value in the SMB space or the smaller customer space, and sometimes you can even determine that's 2000 season (ph) and below, from the point of view that we're able to go out there and win business because we now have a more complete offering and more of a solutions based, where historically we may not have been -- be able to be a number one supplier to those customers but now we can be.

So we think we have a unique differentiated offering that none of our competitors in our space can offer, so to speak.

As an example, I think I talked about this last call.

We're a Cisco gold authorized reseller.

We can sell the high end of the Cisco line that, oh, by the way, 500 seats (ph) and up needs (ph), as an example, that our competitor in CW and obviously nor can Dell sell.

It's not even authorized to sell the product.

So the reality is that we're able to go out there and provide complete solutions and our competitors can't.

This is why -- and this is really our long-term strategy is to go out there and try to be the complete solution for our customer, including we'd love to order the T 1 and the T 3 for you from, you know, six or seven different telecommunications providers all as part of the solution.

Oh, by the way, we'll either install it ourselves or have a third-party contractor licensed through us go out and install it.

So this is where the difference in the strategy on a go-forward basis is.

So when we're adding folks, this is how we want to differentiate and this is why we feel very strong about growing our business specifically.

In the in the U.K. why we're adding reps is we're kind of the only SMB guy out there in that marketplace.

Yeah, we obviously had a huge issue when -- in the June time frame, but the reality is here we are, and we've got a market position there which we believe very strongly we can add to.

So we feel very good about adding -- adding folks on all sides.

On the corporate side in the U.S., we're kind of the Last of the Mohicans out there and we think that we've got a great strategy on having outbound reps when it makes sense on a transaction basis, not on an account basis, and then having inbound reps or support folks and service sales reps that all support that outbound person when it makes sense to.

So we're driving not just by customer but by transaction size when we put somebody on the street, when we do it over the phone, or when we do it over the internet.

This is what we believe the future of our business is going to be.

Now, that said, this is not going to be an overnight change.

This is going to be a multi -year shift in our business model, but we think we absolutely, positively, have to head that direction if we're going to beat Dell in the long run.

And, Chris, this is Stan.

From your -- your first question, overall investor point of view, I mean I guess I can look at our acquisitions in the U.K. and say, well, gee, as we break out our U.K. information for you, but you know what, when we bought that company, it was really combined in with a company that we had bought previously and we did an awful lot of internal growth over there.

So how can you judge that one?

Don't really know.

Certainly co-Mark, we can't break out the information for the reason that we told you.

That's how we run the business.

So to me, from an investor point of view, the only way you can judge whether acquisitions work is over the -- is to look at the EPS overall, and whether that grows in the long run for the company.

That's fair enough.

Thanks a lot, guys.

Thank you.

Your next question comes from the line of Bruce Simpson of William Blair and company.

Hi, guys.

Hey, Bruce.

I wonder if you can break out your revenue along end market lines, particularly given the trouble with co-Mark and how you can't really separate that.

Could you give us some sense of revenue along public sector, SMB, large corporate enterprise, and whether or not you're willing to do that, do you track it that way?

Sure.

From an operating -- this is Stan, Bruce.

From an operating segment perspective, we manage our business now as we told you earlier in the Insight North America, Insight U.K., direct Alliance, and plus net segments, and of course within these segments, we manage our go to market strategies based on customer markets, and we may have separate divisions targeting each one of these separate markets.

However, specific financial information about the individual customer groups will not be disclosed primarily because of competitive reasons.

We know specifically that our friends at Dell are all over this right now, trying to figure out both us and CW, and we really don't want to give those guys any ammo right now that we can.

But Bruce, I think your point is down that information?

Absolutely we know that information and that's how we run the business but we believe from a competitive point of view, it doesn't make sense for us to do that.

And quite honestly, I'm not sure that there are a lot of other people sharing that information out there anyway.

Okay.

Even on a public sector basis, you don't want to ...

No.

The reason that I believe that's disclosed at some others is because of the size of it and required disclosure.

In our case, it is not required disclosure and therefore, we aren't.

Bruce simpson Okay.

Just a couple of other things.

The -- wonder if you'd kind of quantified or if you can update us on once we get past the real hump of the IT platform integration and we're done with all of that, is there any sort of long-term forecast as to what kind of cost savings that might entail?

In other words, if we look out over '03 and even '04, either as a percentage of operating expenses or a total dollar figure, is there any target you can share with us?

Well, if you go back, I mean a little bit -- you know, it really is somewhat dependent upon the sales target, but, you know, historically -- or I shouldn't say historically.

If you go back a couple of quarters, we talked about a $25 million number.

Publicly.

You know, depending on who you ask, you know, that's a low or a high number.

I mean, when I say that's a low number or the real number is much higher.

But I think the reality is a $25 million target is a number that we somewhat focused on internally as kind of, you know, the ultimate number, so to speak.

And that is an annual operating expense savings target?

Yes.

Yes.

Yes, Bruce.

It will come in on the operating line, correct.

Some of it will be on the gross margin, some of it be ...

It will be operating ...

What you care about is that will be 25 million in additional operating earnings.

Yeah.

And Bruce, I'm sorry, I was focusing on the annual versus quarterly.

It's annual, but it can be shared between both gross profit and at the operating expense line.

In other words, there will be some supplier reimbursement pickups, there will be some purchasing opportunities, and down below the line, there will be additional savings from operating expenses in terms of duplication of people, you know, elimination of that, et cetera.

Okay.

And then the final thing, just completely shifting gears, I wonder now that you have built quite a systems capability and you have a public sector piece and so forth, it would appear that categorically, at least, you have a lot more competitive weapons that you can throw at CDW and that the two of you have converged in some sense in terms of the actual offerings to your customers.

And I wonder if you can talk about just competitive landscape specifically against CDW, whether you feel in the last couple of quarters, with what you can bring with co-Mark, you're taking away their customers or they're taking away your customers during the disruption of co-Mark.

Thanks.

A couple things.

I mean, if I had to categorize public sector, it's probably flat, if you want to call it that, for us, over the last couple of quarters.

Specifically, on that, I will tell you that our goal is to actually have public sector converted and integrated a hundred percent, including IT platforms, by the end of Q1, as in March 31st.

That's an aggressive target, we're doing internally, but they're kind of the first test bench, so to speak.

So we think that we can actually hit that.

In fact, folks are in training as we speak, doing that right now.

I think that when we have that integrated and we have the ability to go out there and offer the total solutions and some of these additional services, we will have a competitive weapon.

There is no doubt that CDW is an outstanding job in the public sector over the last five years.

We believe that for the foreseeable future, we can be a strong number two, just because, you know, people always like a second competitor, you know, to go out there and bid against products or be a second source, so we think we can grow the business, in addition to CDW, really taking business not just away from CDW because of our total solutions but also from the point of view that we think that we're the two -- the two long-term guys out there with GTSI more floating in the large contract area.

So I'm actually, as I have been for a while, very bullish on our public sector business.

This quarter specifically, we're focused on integration.

Next quarter, we're really focused on growth and beyond, in the public sector space.

Okay.

Thanks a lot, Tim.

Thank you.

Your next question comes from the line of Greg Eisen (ph) of Safeco asset management.

Hi Tim, hi Stan.

I'll try to make this real fast because I realize this is going too long.

The warehouse consolidation, the Illinois warehouse that you are consolidating into is the co-Mark warehouse, correct?

Correct.

Correct.

And when I saw that facility, if I think I remember correctly, there was extra land to expand there.

Am I correct in that?

Yeah.

Let me give you two -- a couple points of reference.

The Illinois facility is approximately 300,000 square feet, including advanced integration and integration in general.

Our Indianapolis facility was 1,830,000 square feet.

The key thing there is, Indianapolis was always at, you know, 20, 30, 35 percent of capacity.

Really as a back stop in case we couldn't do the EDI drop shipping through the distributors and manufacturers, really as a back stop.

So we've got lots of capacity in Chicago right now.

We're not dropping the EDI model.

We're really optimizing it.

As we talked about a little bit before, I really believe that our percentage of shipments, EDI versus direct, ourselves will actual increase our direct shipments over time but we don't feel we have a capacity problem at all right now?

Chicago.

Okay.

You answered that question.

Second point.

Could you say what your -- your plans for capital spending are next year in total for the year?

And forgive me if you gave out that number.

I stepped away.

Yeah, Greg, no -- this is Stan and we did not.

It's going to be between 25 and $30 million.

The majority of that is software related.

For example, on this IT conversion, about 12 to $14 million will be in that, and that's included in the 25 to 30 million.

So 25 to 30 million annual capex for 2003.

Is that 12 to 14 of outside purchases of software or internal development that will be capitalized?

Both, both.

Both, Greg.

Yes.

Outside and inside.

Yes.

Yes, sir.

Okay.

My last question would be: Stan, will you be releasing a restatement of the prior quarters, Q1, 2, 3, of both years, in the current presentation?

Or are we ...

Oh, I ...

For comparative purposes?

For comparative purposes?

At this time, we're not planning to, Greg.

I see what you're getting at.

We sure had planned to do it each quarter.

We'll give some thought to that, since the question's been asked.

What we might do, if we do that, we'll do that so that everybody publicly can get that.

Maybe at one of our conferences, presentations that are coming up, we can have that ready, since you're asking for it, and then we can get that out to everybody and make sure they see that.

Yeah.

That's a good suggestion.

Thank you.

Okay.

My -- I guess my only other suggestion is, seeing as you see Dell as competition, and you're planning on spending more in advertising, consider the slogan, "Dude, why are you getting a Dell?"

Thanks, Greg.

I'm glad that worked for you.

Okay.

I needed that.

Have a good night.

Okay.

Thank you.

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

Hi, guys.

Just real quick, Tim, would you comment on the U.K. and certainly plus net?

It's somewhat of a - looks like a positive surprise but just comment on, you know, I think that the next quarter or two, you still expect some more improvement there?

I'm actually -- I've obviously spent a greatly of deem in the U.K. in the last six months or so.

I'm actually very bullish on where we're at.

In fact, I was just on the phone with Stuart Fenton (ph), our MD over there, right before the call talking about the business, and where we're going and how we're going to grow it, et cetera.

We've brought on, as I said, another -- a vice president of sales who is an industry veteran.

We've also brought on a director of sales in public sector, in the U.K., heavy experience, and also an head of SMB sales in Sheffield with heavy experience, so I'm very, very bullish in where we're at in the U.K. right now.

As we said, we believe we'll be comfortably profitable in Q1.

In just -- in U.K.

On plus net, the numbers kind of speak for themselves.

These guys are on fire, and I think that both the top and bottom line, you know, it's not -- not material to the overall number but those guys are definitely taking share like nobody's business right now.

So, you know, I don't see anything slowing the momentum of those guys at all right now, but, you know, again, overall, I think we're making significant progress in the U.K. on both sides of the house, so to speak.

Great.

Thanks.

Thank you.

There are no further questions at this time.

Are there any closing remarks?

Thanks, everyone, for joining us, on behalf of Insight Enterprises.

Thank you very much for your support.

Most of all, thanks for all the Insight employees around the world for all your hard work, dedication.

Keep the faith, and go towards success.

Thank you very much.

This concludes this afternoon's conference call.

Thank you for your participation.

You may now disconnect.