Insight Enterprises Inc (NSIT) 2003 Q1 法說會逐字稿

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

At this time I would like to welcome everyone to the Insight Enterprises Q1 2003 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 one, on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

I would now like to turn the call over to Mr. Stan Laybourne, Chief Financial Officer.

Sir, you may begin.

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

Today we will be discussing the company's earnings results for the quarter ended March 31, 2003.

Today 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, and filed with the SEC of Form 8K.

You will find it on our Website 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 conference call participants may have.

Today's call, including all questions and answers, is being web cast live and can be accessed via the investor relations' section of our Website.

An archived index copy of the conference call will be available approximately two hours after completion of the call, and will remain our Website for approximately two weeks.

This conference call, and the associated web cast contain time sensitive information that is accurate only as of today, April 24, 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.

Any and all forward-looking statements that are made in this call are subject to risk 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 annual report on Form 10K for the year ended December 31, 2002.

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

Tim.

Thank you Stan.

Hello everyone, and thank you for joining us.

In a pre-earnings announcement released March 20, we highlighted three key issues seen during the first quarter of 2003.

To preface our discussion today, these are number one, increased international and economic uncertainties that continue to affect the business environment and IT spending, particularly among large corporate customers.

Two, continued progress in our IS systems integration; three, a return to operating profitability in our UK operations.

I will begin today by discussing Insight North America.

Economic uncertainty has caused businesses across almost all industries to tighten or freeze their budgets.

This was seen predominantly among our large corporate customers, and to a lesser degree, among small to mid sized business customers.

The good news is that we don't believe we are losing customers, but rather, our customers are simply postponing purchasing decisions.

We also are pleased that the decrease in demand is not creating irrational pricing competition, and the industry seems to be collectively exhibiting patience until demand inevitably picks up again.

We believe there is some pent up demand waiting, and although we can't predict precisely when IT spending will increase, when it does we expect to see a slow, incremental rise rather than a dramatic surge.

Meanwhile we're making efforts to combat declining sales.

The acquisition of Comark was made on a strategic decision to implement a single source model that differentiates Insight from competitors by combining product sales and services to provide a total solutions package, based on business driven customer needs.

With the rollout of this business model, we believe that our efforts to offer service capabilities to SNB customers are contributing to the comparatively lower sales decline among smaller customers, relative to what we've seen in the large corporate space.

In presentations to industry analyst groups IDC and Gardner Group, we received very positive feedback on our new business model.

On a competitive position as a single source provider for IT products and service solutions, will place Insight on the leading edge of the direct marketing channel.

Toward that goal, our account executives continue their strong efforts to reach new customers and expand relationships with existing customers through targeted marketing strategies, and we have increase training programs designed to teach account executives how to capitalize on our business model and utilize our internal product and service specialists, referred to internally as centers of excellence, to match customer needs with our service capabilities.

Despite the economic conditions that continue to place pressure on sales, we are excited about the long-term growth opportunities of our new single source business model that we'll provide to our company in the future.

Now that I've described how we are realizing the value of the Comark acquisition from a strategic perspective, I will turn toward the technical side and provide you with an update on the integration of our IT systems.

As we stated before on previous calls, we are undergoing an Insight wide migration to a unified and improved IT platform that can best be described as a hybrid between SAP on the back end, and our proprietary Max system on the front end.

The final resulting system is referred to internally as Maximus.

The process required for achieving deployment of Maximus is complex, with a number of milestone steps targeted for accomplishment each quarter.

In Q1 2003, we successfully converted all public sector sales functions that were not utilizing SAP onto the current version of SAP, bringing all of our public sector business onto the current SAP based system acted as a mini conversion for us, before we advance in unison to Maximus.

This past weekend we successfully completed the relocation of previously Illinois based SAP functions to Tempe, Arizona, including the upgrade and transfer of IT system hardware and software that will be used to support the final system conversion.

By June 30, these SAP functions will be upgraded to SAP 4.6, the backbone of the Maximus system.

At this stage, the United States SMB division will still be operating on Insight's proprietary Max system, while the corporate and public sector divisions will be exclusively operating on SAP 4.6.

In Q3, we expect to complete the front end development of the modules to be implemented on top of SAP 4.6 for product management, customer information, and order interface, the web, and functional testing and employee training will begin at that time.

By December 31, 2003, we expect that all U.S. operations will go live on Maximus.

After this goal is met, we'll begin the process of planning and deployment in Canada and the United Kingdom.

There is no current intention to convert Direct Alliance, PlusNet or any other division to Maximus, given the unique operating system requirements and completely separate operations from inside North America and inside UK.

In summary, we're extremely pleased with our progress in this complex and methodical process, and we are confident that our systems integration goals will be met on time, and perhaps earlier during each phase of the timeline.

Of course, like any large system integration, there are inherent risks that could alter the timing or successful completion of our migration to Maximus.

These risks are discussed in the earnings release, and in greater detail in our annual report on Form 10K for the year ended December 31, 2002.

Other efforts to increase our efficiencies in North American operations includethe consolidation of our distribution facilities.

Effective March 1, our Indianapolis warehouse was closed.

Headcount was reduced by the elimination of approximately 44 positions, and inventory was transferred to Illinois.

Cost savings from these consolidations are expected to be realized, starting in Q2 of this year.

We also stated in a previous conference call, that we plan to expand our sales force in order to prepare proactively for an increase in IT spending.

During the first quarter, we added a net of four account executives in North America and 17 in the United Kingdom.

Although we still believe that proactive hiring is a sound long term strategy, given the recent international events and current economic conditions, we will be reexamining our timeline for increasing the number of account executives, and the exact number may, or may not, reach the previously anticipated figures of 2 -to 400 for North America, and 1 to 200 in the UK by the end of 2003.

We do however; expect that these account reps that we do hire will be experienced reps that become profitable in a relatively short period of time.

This now brings me to the UK.

We are pleased to report that we have returned the UK to operating profitability, in line with our previously stated expectations.

It is interesting to note that buying trends in the UK are comparable to what we've seen in the U.S., in that large corporate sales are down, however, we have seen a sequential increase in SMB sales, and an even greater rise in public sector sales in the UK.

It is worth mentioning that Q1 is typically strong in the UK because the majority of UK businesses and public sector entities operate on a Q1 financial year-end, rather than a calendar year end, and purchases are made to utilize the year-end budget surpluses.

Additionally, it should be noted that Q2 historically is a much more challenging quarter in the UK.

However, we feel that the momentum we have built in the UK over the past several quarters will allow Insight to post earnings from operations again in Q2.

As we mentioned in previous conference calls, management is highly focused on applying the traditional insight model, and redirecting account executives to specifically target core SMB customer groups.

Our managing director, Stewart Fenton, is doing an outstanding job.

He's assembled an experienced senior management team, account executive productivity is increasing, and his efforts to redirect management and meet more aggressive sales goals are getting results.

Additionally, Cisco Systems named Insight UK SMB partner of the year for the UK recently.

This award gives recognition to the strong relationship Insight has with Cisco, and it demonstrates that Insight UK is rapidly becoming a leading channel partner, targeting small to medium sized business customers.

Now I'll turn the call back over to Stan Laybourne to give you details about our financial results.

Stan?

Thanks Tim.

I'd like to start by discussing the results of operations for Insight North America.

Net sales increased 52% to $591m from $389m in the first quarter of 2002, but this was due to the acquisition of Comark in the second quarter of 2002.

The additional net sales obtained in the acquisition of Comark were offset partially by decreases in IT spending in an uncertain economic and international environment.

Gross margins in North America, as a percentage of net sales, was 11%, compared to 11.4 in the first quarter of 2002, and 10.7 last quarter.

Gross profit percentage decreased compared to the prior year, due to the lower gross margins of sales to larger corporate enterprises obtained in the Comark acquisition, some declines in supplier reimbursements, and decreases in freight margin.

This decline is offset partially by decreases in the write-downs of inventories and a change in accounting classification for certain funds received from vendors.

The increase in gross profit percentage from the fourth quarter primarily resulted from the accounting classification change for certain funds received from vendors.

As expected, the adoption of emerging issues task force number 2-16, accounting by a reseller for cash consideration received from a vendor, did not have a material affect on Insight North America's financial statements, with only a 4/10 percentage point increase in gross margin, and a corresponding increase in selling and administrative expenses as a percentage of net sales compared to the prior classification.

Insight North America's selling and administrative expenses were 9.9% of net sales, compared to 8.3% in the same quarter of 2002.

Please note that included in selling and administration expenses during the first quarter, Insight North America recorded additional depreciation totaling $1.7m, due to a change in the estimated useful life of certain software assets that will no longer be used after the IT system conversion is completed.

This charge will continue for the balance of the year.

The increase in selling and administrative expenses as a percentage of sales from prior year is due primarily to maintaining duplicate support departments until the IT system conversion, and final integration of Comark is completed.

The change in classification of vendor consideration accelerated deprecation on certain software assets and stay bonuses for certain employees recorded in this quarter.

Insight North America also recorded $2.3m in restructuring expenses associated with costs incurred to close our distribution facility in Indianapolis.

The facility was closed in order to consolidate warehouse and distribution functions in Illinois, in accordance with the integration plan.

This charge primarily represented costs associated with terminated employees, abandoned assets and remaining lease obligations.

Insight UK's net sales decreased 14% to $94.9m compared to net sales of $110.2m in the first quarter of 2002.

The decrease in net sales was due primarily to a weakened IT spending environment over the past year, particularly in the larger corporate enterprise, offset partially by increases in the exchange rates for the United Kingdom.

Insight UK posted an 11% increase in net sales over last quarter.

This is due to a focused effort by the UK sales teams toward public sector and small to medium sized business customers, which has resulted in increased sales offset by some decreases in sales to larger corporate customers.

Insight UK's gross profit as a percentage of net sales was 13.8%, as compared to 12.8% in the first quarter a year ago, and 13.1 in the fourth quarter of 2002.

The increase in gross profit percentage over the prior year and quarter is due primarily to increases in product margin, and a change in accounting classification for certain funds received from vendors.

These increases were offset partially by an increase in write-down of inventories and a decrease in services gross margin.

The change in classification of certain funds received from vendors resulted, again, in a 4/10 percentage point increase in gross margin and a corresponding increase in selling and administrative expenses as a percentage of net sales compared to the prior classification.

Insight UK successfully settled certain liabilities that were assumed with the acquisition of Action PLC in late 2001 in exchange for payments that were $2.5m less than the amounts originally recorded.

Normally this reduction in liabilities would be recorded as a reduction of goodwill.

However, Insight UK recorded a goodwill impairment charge during the fourth quarter of 2002, which eliminated its entire goodwill balance.

Therefore, the $2.5m reduction in liabilities was reported in the statement of operations as income, and was not taxable.

Insight UK's selling and administrative expenses, as a percentage of net sales increased, due primarily to the investment in additional account executives and senior sales management, and the change in classification of vendor consideration, offset partially by a reduction in support staff.

Insight UK eliminated service technicians in certain support and management functions at the end of the fist quarter, and therefore recorded $543,000 of restructuring expenses.

Insight UK posted earnings from operations of $3m, which include income of $2.5m associated with the reduction of certain liabilities assumed in connection with the previous acquisition, and additional restructuring expenses in Insight UK, of $543,000, compared to earnings of operations of $3m in the first quarter of 2002.

Insight UK showed substantial sequential improvement over last quarter, with earnings from operations in excess of $1m, excluding the restructuring expenses and income from the reduction of assumed liabilities.

Direct Alliance posted overall net sales of $19.6m in the quarter, a 24% decrease compared to $25.7m in the first quarter of 2002.

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.

Additionally, one of Direct Alliance's clients is winding down a program that is scheduled to end in May of 2003.

This client represented approximately 8.4% and 17.5% of Direct Alliance's net sales for the first quarters of 2003 and 2002, respectively.

Direct Alliance's gross profit decreased $680,000 or 13% to $4.7m, compared to $5.4m for the fist quarter of 2002.

The decline in gross profit is due to a decrease in sales performance fees from the client whose program will end in the second quarter of 2003, and a decrease in system customization projects performed for various clients.

Selling and Administrative expenses at Direct Alliance decreased due to reductions in personnel and other cost cutting measures.

Direct Alliance posted earnings from operations of $3.5m, a 14% decrease compared from earnings to operations of $4.1m in Q1, 2002.

PlusNet's net sales in the first quarter increased 116%, to $5.8m, compared to net sales of $2.7m, in the first quarter of 2002.

PlusNet continues to experience a shift in the primary source of its net sales from Dial Up to Broadband Internet access customers.

Active Broadband Internet access customers have increased from approximately 1,400 at March 31, 2002, to almost 21,000, at March 31, 2003.

PlusNet's gross profit, as a percentage of net sales, decreased, due to the Broadband Internet access, which is sold at lower gross margins, representing a higher percentage in net sales in the first quarter of 2003.

PlusNet's selling and administrative expenses, as a percentage of net sales, decreased due to an increase in net sales, offset partially by increases in personnel expenses, and bad debt expense.

Earnings from operations increased to $514,000, compared to earnings from operations of $374,000 in the first quarter of 2002.

Cash flows from operations in the first quarter of $88m resulted primarily from a decrease in accounts receivable, an increase in the accrued expenses and other current liabilities and net earnings.

The decrease in accounts receivable is due to reduced sales during the quarter, along with a lower percentage of the quarter's sales being made at the end of the quarter.

The increase in accrued expenses of other current liabilities resulted primarily from payments on binding customer contracts that have not yet been recognized as net sales.

Our outstanding balance under short-term financing arrangements was reduced to $30m at quarter's end, from $91m, at December 31, 2002.

This reduction was funded by cash flow from operations and borrowings under our inventory facility, totaling $6.5m that are included in accounts payable.

At March 31st, 2003, we had approximately $51m in cash.

Historically, we have provided ranges of anticipated sales and diluted earnings per share on a quarterly basis.

Last quarter our guidance provided only a range of diluted earnings per share.

In accordance with our philosophy of focusing on long-term benefits to our shareholders, and to be consistent with the practice adopted by other large companies, we will not be providing future guidance for either the top or bottom line.

However, in order to minimize the effects of discontinuing these estimates, we are now providing a more detailed breakout of our operating segments, and greater amounts of data, including trends and key drivers within the business.

This information should help investors achieve a good understanding of the current state of our business.

Additionally, for the past several quarters, we have been contemplating providing monthly sales figures to the market.

We have, however, elected not to so.

The reason for this decision is that larger corporate customers can create fairly significant variations in daily, as well as month-end sales.

Additionally, our year-over-year comparisons would be meaningless, since we did not acquire Comark, until April 25th, of 2002.

Given these reasons, we are not providing monthly sales data, although we may reexamine the issue at a later date.

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

Tim?

Over the past few quarters, we've been in execution mode.

As we wrap up the first quarter of 2003, we are in the midst of turbulent international and economic conditions.

However, we are proud to be successful in accomplishing the goals we set for ourselves internally, and in turning our UK operation around to operating profitability.

We continue to work through the Comark integration process until the end of this year.

We will continue to focus on the business aspects we can control, and that includes fine tuning our sales strategies, to combat a persistently sluggish IT spending environment, and to continue to implement our single-source business model, to maximize our ability to capture market share.

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 one on your telephone keypad.

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

Your first question comes from Brian Alexander, of Raymond James.

Thanks, can you hear me OK?

Absolutely.

OK, Stan, it sounded like you were headed somewhere with providing more information, I guess.

You started out by saying no guidance, and then you also said no monthly sales.

So, I guess are we to assume the only information is going to get is when you report?

That's my first question, and then I have a follow up.

OK, Brian, that is correct.

The only information at this point will be when we report next quarter.

However, we are continuing to monitor that.

My purpose in going through the dialogue I did is that this is something that we have been considering for the past several quarters.

For the reasons that I outlined, we just don't, at this time, feel that it's proper to do.

But it's something that we could change and we'll monitor things as it goes along.

But at this point, Brian, you're absolutely right.

We're planning just to give you when we announce.

OK, and then for the quarter that just ended, can you just provide any sort of quantification of how your North American sales fared?

On SMB, vs. large corporate, I imagine large corporate was down a lot more sequentially than SMB.

Any number you could put on that would be helpful.

And then, if you could just comment, maybe qualitatively, on what you're seeing out there so far in April?

One of your competitors, PC Connection, today indicated that things in the SMB sector have picked up as of late.

I'm wondering if you're seeing that as well?

Thanks.

On the first thing, SMB was basically flat.

Corporate was a little bit down from Q4, specifically, when you're talking about numbers.

In terms of what we're seeing so far, April is traditionally a bad month in general.

So, it's basically what we expected.

We have not seen a material pick up.

I don't know what PC Connection was relating to when they said that.

Are they talking 1%, or 10%?

So, I'm very curious to see what PC Connection was saying in terms of quantifiable numbers.

But we have not seen what we would call a material pick up in April.

OK.

Just to clarify, on the March quarter, and by the way, I think they said up 1% to 5% sequentially, SMB for the June quarter.

On the March quarter, if SMB was kind of flattish, sequentially, that means that the large corporate business was probably down close to 20%?

Would that be fair?

We don't give specifics on that.

So, our reportable segments, all we give is North America.

So, we do not give that specific information in terms of detailed numbers.

OK, and then just a final, Stan, on the EITF impact, I think you gave some numbers by segment.

Do you happen to have the total impact on consolidated gross margins from that change?

In terms of dollars, Brian?

Basis points, or dollars; whatever you have.

It's roughly 4/10th of a point, overall.

In terms of dollars, it was $2.3m in North America, and roughly a little over $400,000 in the UK.

Both of them were about 4/10th and I think when you work that through, it's about 4/10th.

That's why I said earlier, if you remember, in the U.S., it went to 11%, from 10.7% last quarter.

It was really due to this change.

OK, thank you very much.

Your next question comes from Stirling Levy, of Morgan Stanley.

Hi, Tim; hi Stan, a couple of questions if I could?

First, with respect to the tax rate, it came down in the March quarter.

How can we think of modeling the tax rate for the rest of fiscal '03?

Stirling, this is Stan.

First of all, as noted in the press release, and also in the conference call script, there was UK income that was not taxable, that was fairly significant.

That is the reason that really skewed it dramatically this quarter.

I think in terms of modeling, when you go back to the December quarter, that that's probably the rate that's a fair approximation right now.

As you noticed in the press release and the conference call script, there are some ups and downs, such as Canadian rates coming down;

U.S. rates going up here and there.

But overall, and I think that probably that last fourth quarter was pretty approximate.

And if you want to be a little bit more aggressive, you might take it down a little bit.

But, from a conservative point, the fourth quarter is pretty conservative.

OK.

Thank you.

My next question is, if I did my math right, it looks like Direct Alliance is about 31% of your operating income.

And the press release says that 65% of DAC's revenues came from one customer.

So, if we assume that revenue and that operating profits in that DAC group are a good proxy for each other, then about 20% of the entire company's operating income comes from one DAC customer.

How confident are you in the ability to retain that customer?

And how do we think about that risk, going forward?

This is Tim.

Obviously, because we're going through the integration process, we have one extra cost right now.

The operating income from DAC is higher than it normally has been historically, and what it should be on a go-forward basis.

That said, obviously anytime we have a large customer, whether that large customer is on the Direct Alliance side, or just a customer of Insight, we're keenly aware of who that customer is and the impact of the business.

I will tell you that, specifically on the Direct Alliance side, every senior executive is extremely familiar with that client, and hopefully driving that process to make sure that we don't lose that client, in fact, hoping that we gain share and traction within that client.

That said, there's nothing to prevent any client, or any customer of Insight, from switching away from us, over a long period of time.

Thank you.

Just a last question, if I could?

The 10K mentions, perhaps, a possible divestiture of PlusNet.

Can you just help us think about that business going forward, in terms of your strategic plans?

Thanks, specifically on PlusNet, it's a business that we obviously know a great deal about.

We acquired that business as part of a UK acquisition back in '98.

So, it wasn't really our intent to get into the ISP business.

That said, we have an asset that's growing obviously tremendously right now.

Part of that is, we'd like to get paid for that asset at a reasonable or market rate.

Our long-term goal is not to be in the ISP business.

But, our long-term goal is to maximize shareholder value.

If, at any time, we were to receive a good offer for that particular business, we definitely would consider it strongly.

Thank you, guys.

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

Hi guys.

For what it's worth, I vote for monthly sales data, just in case you cared.

Second, I'm wondering if you're seeing any additional visibility at all in government and large customers today, vs. what you saw, let's say through the first quarter?

I think that's part of what PC Connection was saying also.

We have not seen a material change, and I guess we could argue on, is 1% to 5% material or not material either way?

I think that we're more looking for a significant change before we come out and say something.

I think they're talking about a sequential gain, so that is pretty significant.

But, in terms of the large customers, though, is there any increase in just visibility, or budgets coming free, more discussions, anything anecdotally that you can tell us?

I mean, we have had a lot of discussions.

There's a whole lot of corporate customers out there that are looking at this.

But again, just like in Q1, there's a definite need, but the budgets just aren't there right now.

I feel pretty good.

Obviously, we've got the Windows Server 2003 coming out, you know, a big push towards the later half of this year, that hopefully can signal a whole new upgrade cycle on at least the terms of the PC Notebook Server side.

That said, we just don't have, we haven't translated all the conversations into sales yet.

So, I'm not comfortable in terms of forecasting, you know, a so-called up-tick in demand until we actually see it come through in the sales numbers.

OK, and back to DAC again.

I believe we're still at five or six customers there, and you say that you're confident you can add customers there, but we really haven't seen it over the past couple of years.

Maybe you have some more assignments with those existing customers, but why haven't we seen an increase in the number of customers at DAC, and does that also add to the risk of getting caught when one of these customers would happen to leave?

Actually I think that we have not disclosed a lot of specifics on DAC.

Our number of customers and clients is significantly above the number that you said.

The other one is that we added two additional clients in Q1.

They're not material today, but we think they were significant companies, and we think over time they will be.

So I think it's one of those things where if you look back over the last five or seven years of direct alliance, they've added and subtracted the majority of accounts.

It's kind of an ebb and a flow in that business.

So on any given quarter you may see somebody come or go, as an example.

Obviously the person that left us last time, we had known that they had chosen to take that program, for the most part, in house.

That said, I think over a long period of time we are focused on adding new clients.

Oh by the way, as a side note, we've never lost an account in Direct Alliance due to service or due to our ability to perform.

That has never been an issue in Direct Alliance.

So our two new clients that we added in Q1, I think are hopefully going to be material and significant over a couple of year timeframe.

OK, then final question.

I'm just looking at the first call estimates here, and just trying to, I know you're not going to give any guidance or anything, but when you think about where earnings can go this year, we've got numbers that are up 50% by the third quarter and up 100% by the fourth quarter.

I'm just trying to understand how you feel about that.

Is that something you feel is attainable, and if so, how do you feel you can get there?

Well first of all I think a lot of it determines on the external IT spending market, and who is projecting or predicting when it's going to come around, and as we've stated, we haven't seen it yet, and not exactly sure when it does, and in our opinion when it does, it won't be a rapid one, it will be a gradual one.

So that's one thing to take into account.

The second one, which we have tried to give you an abundance of information on, is the additional costs that we're incurring in bringing these two systems together, which as we've said, will really remain there through 2003, and so consequently you aren't going to see a lot of those disappearing until that conversion actually takes place.

So I think those two things have to be taken into account in determining where things are going to be in Q2, Q3 and Q4.

All right, thanks Stan.

Your next question comes from Chris Hussey of Goldman Sachs.

Hi guys.

A question on the cash flow if you could, first.

How sustainable, Stan, is that cash flow that came in, should we see that reverse itself on the working capital side immediately, or is some of that sustainable?

Well I think first of all, you know, as we pointed out to you, that there was some unusual items in there that you have to take into account.

First of all, in this business when sales grow, and particularly toward the back end like they had historically, that's going to use more cash than it does in this environment, in which sales are declining, and in which sales are pretty flat throughout.

So I think that's one factor that has to take into account.

The other thing is that when you look at that in terms of the accrued liabilities, as we explained, there was some unusual activity in that, if you recall 1231, we had deferred some sales and placed in the balance sheet, which were binding contracts.

Those customers paid that money to us, and so consequently we collected the money.

However, it hasn't been recorded as a sale yet.

So that certainly affects cash flow, and that was roughly $20m in that line.

The other thing that I think might be of interest to you, that if you look at our cash situation today, we're still at roughly over $40m in cash that we have today and in fact, our line of credit is paid down another $10m, down to $20m from the $30m that we had as of March 31.

So I guess what I'm saying to you, Chris, in a couple of ways, is first of all, you've got to take into account the environment we're in.

When, and if it turns, we're going to utilize more cash because that's how this model works.

But in this environment that we're in right now, because we have good receivables, we collect them, and that props up into cash flow, which we see coming in at this point.

if you look at DSO's today versus lets say two, three, four quarters ago, we've made significant progress in our DSO collections.

So to kind of wrap up what Stan said, doing $83m in positive cash flow is probably not repeatable, and for all those reasons we said.

But obviously we are positive cash flow right now.

I understand that.

Stan, on that contract that you've collected from the customer, have you paid for the inventory that you have there, or are you going to have to now start buying the product and shipping it to them, and not getting paid?

The inventory there is just like any other inventory that we buy, and most likely it has been paid for, because it was acquired in Q4.

So it's probably been paid for and is separately segregated in our financial statements as well as the warehouse.

So yeah, it's probably already been paid for.

What was the foreign exchange impact during the quarter?

Real quickly, if you go and look year-over-year, in North America it was roughly $12m and - or excuse me, in the UK it was $12m and Canadian was $1m roughly.

If you look Q4 to Q1 it was roughly $2m UK and $1m Canadian, roughly.

So what I'm saying is Q1 to Q4, $3m, and Q1 to Q1 $12m.

And you mentioned Tim -

Excuse me Chris, that's sales I'm talking about.

That's a revenue impact from the FX?

Just to make sure, yes, it's revenue.

I didn't want you to think that was bottom line or something.

That would be something.

Yeah, that would.

You mentioned in the press release that part of the issue on your margins is you're not seeing as much in the way of customer rebates, vendor rebates.

That was mentioned in the context of a discussion about margins declining year over year.

Year over year the amount of product you sell because of Comark has grown dramatically so I'm a little bit lost.

Why is it that you feel that you're not getting as good treatment any longer, even though you're selling much more product?

I think part of it is, there's a couple of different things.

We're still on two systems, so we still haven't garnered a lot of the ability to actually buy from one system specifically in terms of sales out on that side.

The other side of the coin is that right now in the corporate side we've definitely been squeezed on some of the back end dollars that we get on the corporate side of the business.

So all the rebates and things that we used to get historically, we are not getting on the corporate customers specifically.

That said, we are totally redoing how we do that process, and it's kind of an ongoing evolution over the next one or two quarters, and we hope to actually increase that number fairly dramatically.

That said, there's no guarantee that's going to happen.

Last question.

Can you give us an update on your marketing program?

You guys had indicated last time that maybe you were going to try and do a little bit more national.

We actually have not done a lot of national; we're actually doing more specific regional and specific verticals, as an example.

As an example, trade shows, whether it's in the legal, or actually in the government sectors specifically, hospitals right now.

So we haven't actually technically rolled out any nationwide branding campaign.

It's more specifically driven around specific customer demand generation campaigns.

As an example, if you looked at what you would call a catalog or a brochure, a hard copy brochure literature pack that we did for Hewlett Packard at Insight, specifically talking about some of their enterprise global solutions around tape backup storage and storage solutions around NAS and SAN systems.

So we're going out and marketing but we're not doing, let's say, the national advertising, how you might think of on TV or radio as an example.

Is your marketing spend up though, year over year?

Yes, dramatically.

Do you want to put a dollar number on it?

No.

The reason I say that, is that-let us look at that-let me come back to you on that.

That's fair enough.

Hey, thanks guys.

Again, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad.

Your next question comes from Brett Miller of A.G. Edwards.

Hi everybody.

Can you hear me all right?

Absolutely.

OK, if we can go back to Direct Alliance Corporation real quick.

You mentioned that you guys had put on a couple of new customers.

Back a couple of years ago you talked about driving into the non-PC market.

Could you tell us if these customers are in the PC arena or outside of that?

They are definitely in the technology world, not necessarily the PC world, but the technology world.

OK.

Also if we look out at the new business model, how should we be thinking about inventories, turns and drop/ship going forward with more of the larger corporate customers in there.

One of the things, if you look at it, if you take away the drop/ship numbers our inventory turns actually went down year over year.

I think what you should probably look at is, what Q1 was is probably the model going forward.

We might squeeze out some more inventory turns on the inventory we touch.

That said, we project that more of the product that we ship is actually going to come through our distribution center going forward.

It won't be a radical shift, I've been talking about this for a couple of quarters, but I would say it will go up fairly dramatically from where it's at right now, in terms of what we touch and what we drop/ship.

So we're going to touch more inventory over time, not less.

With that said, is there going to be a higher function of the inventory that's custom configured and/or service net margin type business there?

That is the goal.

The goal is to add value when we can get paid for it.

Again, long term, we are still, if a customer only wants to buy products at a great price, we absolutely want that business.

It's when we can add additional value and additional service, additional margin dollars and solve the customers' problem that we're going to go out and do that.

Only when the customer sees the value will you see us add additional layers of cost onto the product.

Does that make sense?

Your next question comes from Jeff Nixon of MCM.

Good afternoon.

Stan, I was just wanting to confirm, so that $20m that you didn't book in sales in the December quarter, you did not book in the March quarter either?

Actually some of that, a very small portion of that did go out, and we had some others that came in that we did not book, and hence the amount is roughly the same.

If you look inventories not held for sale on the balance sheet, they're both roughly about $20m, but of the specific one in December a portion of that, a small portion of that actually did go out in Q1, and right now it's anticipated that the majority of the balance of that will go out in Q2.

OK, then secondly, what is kind of the trend in the salesperson turnover.

This quarter you added net four in America, I just wanted to determine what the kind of turnover was like, and how that compares to a couple of years ago, I guess, when the sales guys were making more money.

I don't have the exact numbers, but I can tell you that the turnover numbers, specifically in the U.S. in Q1, was down dramatically, and I mean dramatically, from what it was not only in Q4, but also historically.

I don't have the numbers off the top of my head, but I mean a huge, huge decrease in turnover in the U.S in Q1.

And what do you attribute that to?

Well a combination.

We somewhat culled our sales force of the weak and non-performers in Q3 and Q4.

We're also not on an aggressive hiring campaign, except for experienced reps, so, we're not adding just huge tons of folks.

We've also, I think, got a tremendous buy-in internally on basically, kind of the evolutions business model, where we're going and where our market position is right now.

So, I feel very, very good about where we're at with our sales force right now, especially in the U.S.

OK.

Great, thank you.

Your next question comes from Bruce Simpson, of William Blair.

I'm just following up on that prior question.

Can you tell us, now, what you're thinking about where you want to be at year-end, in terms of total sales people, relative to what you might have told us before?

Well again, my goal there is to add sales people that we can find and hire that are experienced, and from the industry.

That's basically people that we can put them on the ground and have them running almost immediately.

One of the interesting things about this environment that we're in is that a lot of our competitors, especially smaller, weaker competitors, specifically regional VARs, we're seeing, really, I don't want to call it a [unintelligible] on our sales forces, because either they don't have the capabilities to service the accounts, they don't have the buying power or don't have the financial wherewithal to survive in this environment.

So, we're getting tremendous numbers of phone calls from existing reps from basically competitors of all sizes.

So, those are primarily the folks that we're looking very, very hard at right now.

We are not looking to go hire people right out of college, as an example, and go train them in, if you want to call it, in the Big Three, which is customers, how to sell product data, and then obviously wrapping it around how we work, as an example.

But specifically, I think you've got to look at this and say, we're going to be opportunistic if we go out and find somebody.

We're not going to go out and actively say, we're going to absolutely find 400 more people this year.

Hey, if the number ends up being 100, so be it.

If the number ends up being 300, so be it.

We're looking for folks that can hit the ground running, very, very quickly.

OK.

So, you don't want to kind of have a target out there, for us to track against?

You're just sort of opportunistic, as you described?

It's probably not on the high end, and it's probably not in the low end of the range previously given.

It's probably literally right in the middle.

That said, we're only one quarter into it.

I really would've thought that we would've hired more than four, in North America, in Q1.

I really thought that we'd get a lot more than that, in the quarter.

It ended up being that, so it's hard for us to go out and forecast exact numbers.

You know, three and four quarters out.

I just don't have comfort on that, on exact numbers.

OK.

Follow up in the next question about distribution.

You closed Indy, is that right?

So, is everything being shipped out of Illinois, now?

Correct.

Within that warehouse, are you securing revenue from, sort of storing merchandise for customers?

Yes.

Those are definitely billable, if you want to call them service fees that we charge.

They're billable in a couple of different ways.

One of them is on new inventory, or if we're taking back old inventory and it's either for disposal, or specifically to redistribute or reallocate to another location of that particular client's.

So, all those are, if you want to call it, billable services, specifically to the customer.

We may also recondition, redo images, refurbish, add, and subtract components or configurations as part of that.

Can you quantify at all sort of how that shakes out as a percentage of revenue, relative to traditional reselling?

That specific area is very small, in terms of the overall program.

It's a great business for us.

We would have to go back and look at that in terms of exact numbers on that specific service.

OK, thanks Tim.

At this time, there are no further questions.

Mr. Laybourne, are there any closing remarks?

Thank you very much for attending our conference call.

Thanks to all the employees worldwide, for being part of the Insight team.

Goodbye.

This concludes today's Insight Enterprises Q1 2003 earnings conference call.

You may now disconnect.