Insight Enterprises Inc (NSIT) 2003 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q3 2003 Insight Enterprises Incorporated earnings conference call.

My name is Christie, and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will be facilitating a question-and-answer session towards the end of the conference.

If at any time during the call you require assistance, please press star followed by the zero, and the coordinator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Stanley Laybourne, Chief Financial Officer.

Please proceed, sir.

Thank you.

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

Today, we will discussing the company's operating results for the quarter ended September 30, 2003.

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 on 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 webcast live and can be accessed via the Investor Relations section of our website.

An archived indexed copy of the call will be available approximately two hours after completion of the call and will remain on our website for a limited time.

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

This call is the property of Insight Enterprises, Inc.

Any redistribution, retransmission, or rebroadcast of this call in any form, without the written -- expressed 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 described in today's earnings release and also in greater detail in our quarterly report on Form 10Q for the quarter ended June 30, 2003.

I will now turn the call over to Tim Crown for opening remarks.

Tim?

Thank you, Stan.

Hello, everyone, and thank you for joining us.

Today my comments on the third quarter, 2003, will be focused on providing an overview of performance trends and news for each of our segments, a status update regarding the IT systems conversion in progress across Insight's North American operations, and information about executive management changes.

Stan will then provide an overview of financial results for the quarter.

Overall, for Insight Enterprises, we're pleased to report sequential growth in net sales and net earnings over Q2 2003.

Although net sales increased less than 1%, that earnings grew almost 30% from last quarter.

Sales for Insight North America were relatively flat, down less than 1% sequentially and trends by the customer group were generally consistent with the prior quarter.

We continue to see slight increases in large corporate space, and increased RFP activity remains encouraging.

The public sector has had a slightly stronger third quarter, as expected, although the sales basis is a relatively small percentage of Insight's North America sales total.

Increases in large corporate public sector sales are partially offset by a slight decline in the SMB customer group.

We believe the slight decline was the result of our focus on the final stages of our U.S. systems integration, a temporary distraction, which we believe will be short-lived.

Additionally, certain large SMB accounts were moved to the corporate division during the quarter, which somewhat skews the comparison.

Overall, I think it's accurate to say that net sales across all customer segments showed no substantial decline or improvement compared to last quarter.

Insight UK saw its third consecutive quarter of operating profitability and posted a sequential increase in those sales and earnings from operations as we continue to try to get small to medium business customers effectively.

With regard to our other two business segments: Direct Alliance saw a slight sequential increase in net sales and continues to provide strong operating profits, despite the end of a client relationship last quarter.

PlusNet continued to post growth in both net sales and earnings from operations by attracting increasing numbers of broadband customers.

We are very proud to announce that PlusNet was recently recognized by PC Pro magazine as the best broadband internet service provider in the UK, receiving this designation over the large, more prominent competitors.

As we noted in a press release during the quarter, we began collecting sales tax across all customer segments in the United States, effective September 1, 2003.

We are pleased to report that we received virtually no negative feedback from customers, and we believe there was no material negative effect on sales attributed to this expanded sales tax collection.

We were pleased that September was a strong month across all customer segments, and the momentum appears to have continued into October.

Although we are not ready to characterize recent activity as a rebound in IT spending, we remain cautiously optimistic going into the fourth quarter.

Another reason for optimism is the progress of our U.S. systems integration.

I am pleased to report that we have deployed our new Maximus system across a large portion of Insight's operations in the U.S.

We have effectively accomplished most of the major technical milestones involved in what will be a very complex IT systems integration plan, and the remainder of which integration [inaudible] at the end of Q4 will be focused on migrating our Tempe-based SMB and corporate sales accounting executives on to Maximus, including the new account representative User Interface.

We will also be migrating the respective customers to our newly-designed Insight.com website.

This training is being conducted in phases.

Rolling out the new account representative User Interface is small groups of account executives approximately every two weeks in order to minimize disruption to daily business.

Feedback from those account executives already using the new account representative User Interface has been very positive.

The training process has required less time than originally anticipated, and general consensus on the sales floor is that our accounting executives are eager to start using the new account representative User Interface.

We will continue to support through the previous system until all SMB account executives have successfully completed the migration.

Additionally, we are in the process of implementing the virtual sourcing model.

We recently reached the go-wide status, and, therefore, have not yet completed a month-end close and financial statements under the new integrated Maximus system.

Of course, Stan would never let me say most technical milestones are completed without making that fact apparent.

We have taken numerous steps in planning, training and testing to mitigate any material issues.

Until all receivables, payables, and sales returns associated with sales under the old systems are processed, we will continue to maintain the old system along with Maximus, although virtually all new activity will flow through the new Maximus system by year-end.

We also have processes in place to mitigate operational risks and fast-track solutions wherever any technical issues may arise.

For example, this past week we experienced technical difficulties with our large corporate customers' custom web landing pages.

The issues were resolved in less than a week, and we believe there was no material negative impact on sales.

So, I am pleased to report that we remain on track for completing the U.S.-based systems integration by the end of the year, including departmental consolidations for IT and accounting so that cost savings can be realized in Q1 of 2004.

I would like to give a special thanks to all employees who have spent and continue to spend the extra time necessary to make the system conversion the success that it has been so far.

Without your drive and dedication, none of this would be possible.

As stated previously, we will continue to maintain and enhance the system as needed in 2004, including making additional enhancements to the user account representative interface for our large corporate group.

Until all aspects of the systems integration are complete, I will again remind listeners that there are inherent risks that could alter the timing or successful completion or migration of Maximus.

These risks were discussed in greater detail on the quarterly report Form 10Q for the quarter ended June 30, 2003.

In order to focus our IT resources in 2004 in systems enhancements, we plan to introduce the Maximus system into our Canadian and UK operations in early 2005.

There is no current intention to convert Direct Alliance or PlusNet to Maximus, since they both have unique system requirements, and the day-to-day operations are separate from the operations of Insight North America and Insight UK.

We also announced today that Tony Smith, the company's current President, will resume his previous role as President of Direct Alliance, and I will assume the additional role of the company's President.

In connection with this change in the management structure of the company has been realigned in order to redeploy the talents of our current executives in a manner that will best accomplish company-wide goals for 2004 and beyond.

I am pleased to announce that Dino Forfante will be promoted to President of Insight's Direct Worldwide and will oversee all Insight North America and Insight UK sales, marketing ,and distribution functions while Stanley Laybourne and Robert Moya will handle the company's administrative aspects, including Finance, Human Resources, Facilities, Risk Management, and Legal.

As such, Stewart Fenton, Managing Director for Insight UK, will be reporting to Dino.

Allowing Dino Farfante and Stewart Fenton to coordinate strategic efforts and focus on areas directly affect a customer will help unify the global Insight brand and help assure that we effectively take advantage of our competitive positioning as IT spending rebounds.

Our focus in 2004 will be: educate our customers, sales people, and suppliers on our product and services offering and prove that Insight is truly the single source solution.

I am very proud to say that over the past 15 years we have grown from a small, catalog-based reseller to a leading multi-billion dollar single-source supplier of IT products and services to businesses in the United States, Canada, and the United Kingdom.

Over the past 18 months, we have integrated an acquisition and almost doubled our size and propelled us in number 506 in Fortune magazine's 2003 made the Fortune 1,000 list.

We want to enhance our strong management team with the addition of one or more seasoned executives, one of which could include the company's President, who could help lead the company to new levels.

Tony Smith played a key role in developing our new strategy and did a tremendous job of leaving a successful acquisition, integration, and systems conversion.

I am excited to announce that he will be back as President of Direct Alliance, focusing his efforts on business development.

That concludes my overview of the third quarter and executive management changes.

I will now turn the call back over to Stan Laybourne to give you some specific financial results for each of the operating segments.

Stan?

Thanks, Tim.

Some substantial detail and year-over-year comparisons are included in the earnings release.

I will focus my discussion on the fluctuations from last quarter.

Let's begin with Insight North America.

As Tim stated, net sales were relatively flat, down less than 1% compared to last quarter.

The number of account executives was reduced by approximately 100 during the quarter to 1,208, with those net reductions primarily based on performance.

Average tenure of our North American account executives is up from three years last quarter to 3.2 years with 24% of the account executives having less than one year experience, 14% with one to two years, 14% with two to three years, and 48% with more than three years experience.

Gross margin decreased sequentially this quarter to 10.9 percent from 11.3%, due primarily to decreases in service sales and product margin, offset partially by an increase in supplier reimbursements and a decrease in the inventories provision.

Additionally, gross margin was higher in the second quarter, due to some reductions last quarter in the reserves for bend or receivables.

Selling in administrative expenses is a percentage of net sales, decreased sequentially to 9.1% from 9.8%, due to cost-cutting initiatives, including some head count reductions initiated last quarter, a reduction in stay bonuses expensed, as many stay bonuses were paid this quarter when the final dates were reached in the stay agreements, and an increase in IT labor that is capitalized related to the Maximus system conversion.

As we had previously stated, the majority of our cost savings from migrating Insight's U.S. operations to one come on IT platform will not be recognized fully until Q1 of 2004.

At that time, the systems integration will have been completed and support departments will have been consolidated.

After December 31, 2003, the following current quarterly expenses will not be incurred: $1.7 million of accelerated depreciation; $237,000 of stay bonuses for certain employees; and at least $1 million in salaries due to physicians that will be eliminated after the integration.

Of course, we expect eventually to realize additional efficiencies from the Maximus system, and long-term, it is still our goal to reduce our consolidated selling and administrative expenses to be 27 1/2% and 8 1/2%.

To achieve this target percentage, we need to experience both an increase in net sales or implement additional cost-cutting initiatives.

Now, this brings me to Insight UK.

Net sales this quarter increased sequentially to $96 million from $91 million in Q2 2003, as we continue to build momentum in the UK market.

Decreases in the British pound sterling exchange rates for last quarter did not have a material effect on net sales.

We expect to see some possible weakening in demand in the fourth quarter as the United Kingdom has historically experienced seasonal increases in demand during the first and third quarters of the year.

Average tenure of our UK account executives remain consistent with last quarter at 2.4 years with 42% of the account executives having less than one year experience, 15% with one to two years, 16% with two to three years, and 27% with more than three years.

Gross margin decreased sequentially this quarter to 13% from 13.2%, due primarily to an increase in inventories provision, offset partially by improved product, services, and freight margins.

Selling in administrative expenses as a percentage of net sales decreased sequentially to 11.7% from 12.4% due primarily to the increase in net sales without a corresponding increase in selling in administrative expenses.

Insight UK continues to contribute positive earnings from operations and posted a 76% sequential increase to $1.2 million.

Regarding Direct Alliance, as we stated last quarter, one client relationship ended as scheduled last quarter.

This client represented approximately 3% of Direct Alliance's net sales for the second quarter and contributed no net sales in the current quarter.

Direct Alliance posted a sequential increase in net sales from $18 million to $19 million, due primarily to an increase in pass through product sales.

Earnings from operations are down slightly from $3.8 million to $3.7 million, due primarily to some additional administrative expenses associated with the start of a new reseller program.

We are pleased that Direct Alliance was able to maintain healthy earnings from operations, despite the end of a client relationship last quarter.

PlusNet continues to experience a steady increase in net sales as UK internet customers continue to shift from dial-up to broadband internet access.

Active broadband customers increased 29% from last quarter to 34,861.

PlusNet's net sales grew 8% sequentially to $7.1 million, and earnings from operations grew sequentially 15% to $835,000.

Decreases in the British pound sterling exchange rate from last quarter did not have a material effect on net sales.

Cash flow from operations continued to be strong, and the outstanding balance under our financing arrangements was further reduced this quarter to $10 million from $15 million at the end of Q2 2003.

We also had approximately $30 million in cash at September 30th.

On October 29, 2003, we paid off approximately $11.9 million of building mortgages with interest rates ranging from approximately 7% to 8% with borrowings from existing financing arrangements.

Pre-payment penalties of $628,000 were also paid, and capitalized loan origination fees of $173,000 were written off.

Both of these amounts will be recorded as non-operating expense in the fourth quarter.

Based on the current interest rates under our financing arrangements, the expected interest expense savings will exceed the pre-payment penalties in less than one year.

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

Thanks, Stan.

I would again like to say that we remain cautiously optimistic about recent indicators that IT spending is beginning to regain some momentum.

As our U.S.-based Insight systems integration winds to a close in Q4, we are naturally seeing a greater internal focus during employee training and deployment schedules.

However, measures are in place to minimize the impact on productivity, and our full focus in 2004 will return to our customers at communicating Insight's value to business of public sector customers of all sizes.

Our sales force is eagerly adopting a new culture in which the selling environment focuses on total solutions, rather than just products.

This shift is exciting and rewarding for our account executives because they can now approach customer calls with renewed purpose and are able to bring greater value to customer relationships than ever before.

As we look ahead to 2004, we believe our sales force will become increasingly more effective at communicating and applying Insight's value proposition to our customers' IT needs.

We also will pursue more direct marketing initiatives to help increase our customer awareness of our extensive product and service capabilities.

We believe our single-source business model in North America and our targeted focus on SMB customers in the UK has positioned us in precisely the right place and the right time to capture IT dollars, when they begin a long-awaited increase flow back into the marketplace.

That concludes my comments.

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

Ladies and gentlemen, if you wish to ask a question, please press star followed by a 1 on your touch-tone telephone.

If your question has been answered or you wish to withdraw your question, press star followed by 2.

Questions will be taken in the order received.

Please press star 1 to begin.

Your first question comes from David Manthey of Robert W. Baird.

Please proceed, sir.

Thank you.

Hi, good afternoon.

Good afternoon.

Is there any chance that the lower SMB sales that you saw year to year is related at all to the tax collection today?

And if you say no, how do you track that?

Well, what we've done is we've done a tremendous number of customer surveys over time on this specifically to ask them, Why do we think -- or do we think sales tax collection will help or hurt us?

In some accounts, there's no doubt it will hurt us, but in other accounts, it actually helped us, where people didn't want to have different suppliers, where in certain scenarios, they would pay a sales tax on some invoices.

Other invoices they did not.

But overall, we do not think it had a material impact on our revenue.

When you say it may be a benefit for some and may hurt others, could that potentially be that SMB is a segment that the sales would go away and the corporate side maybe it would help?

Yes, but let me quantify or stratify it a little differently.

When you look at SMB, most people talk about that as really being between one --obviously , one individual SoHo customer to all the way to 1,000 employees.

We look at SMB specifically as a 100 seats to 1,000 seats.

So over the past five or six years, we've really migrated away from the small SoHo customer, that five or ten-person office and really tried to move up to 100 seats or 100 employees as really being the smallest customer that we would specifically target.

So, I think because of that, we probably haven't seen any impact on the sales tax collection, due to almost every businesses that qualified for that size is gonna go ahead and report use tax at the end of the year one way or the other.

This just simplifies the process for them.

Then SG&A, stay on bonuses in the second quarter of '03.

Did I have this right?

Was it $862,000?

Correct, yes.

Okay, Stan, and 273 this quarter -- were there any accrual reversals in that number or is that a pure number?

That's a pure number, and it's just -- you say agreements, the people were to go to a certain period if they stayed to that period, then they would be paid "X" dollars.

Again, in certain cases, those people hit the areas, so we paid them and stopped accruing any stay bonuses at that point.

So it was not that we had -- I think what you're asking is was it overaccrued in prior periods and reversed here?

No, that was not the case.

Okay, another SG&A question.

Even if I exclude the stay on bonuses, which were lower than we thought, and excluding the UK tax benefit, the SG&A was literally millions below our estimate, and much lower quarter to quarter.

I'm trying to get my head around what else came out of those expenses just for the second quarter, other than the ones you've outlined, and then is there any reason not to assume that the current level of SG&A will be the base going forward, excluding the things that you outlined?

Well, there's a couple things that make up the reductions.

First of all, we have taken out cost over the past three quarters or so, and we took it out in Q2, which really you're starting to pay benefit to us in Q3 and should continue in Q4 after that.

Additionally, another part of it -- of the reduction -- was really as a result of capitalization of IS salaries in connection with the IS conversion that we're doing.

Basically, those salaries -- once the capitalization starts -- either the people you know, are put onto other capitalized projects, or if we don't need them, they're gone or whatever.

So, I think that there is some consideration there that you would think that that could be a continuing type of trend going forward.

Okay.

I think that will do it for now.

Thanks a lot.

Thank you.

Your next question comes from John Lawrence of Morgan Keegan & Company.

Please proceed, sir.

Good afternoon, guys.

Good afternoon.

Tim, would you talk about -- you mentioned specifically about the month of September.

In the past we've always talked about the quarter flows to more of a -- September's the heaviest part of the month.

I mean, heaviest part of the quarter.

How does that relate now, and specifically this quarter?

How did that flow?

Well, we had -- again, we're talking specifically like in the last 12 months.

September was a pretty strong month, even for a third month in a quarter.

And then October has also started very strong.

Obviously, we're at the end of it right now.

One more day with it.

So we're very encouraged that we're seeing, you know, a pick up in demand overall that is stronger than it has been over the last let's say three or four quarters.

So, again, we're not wanting to call it a turn in the IT spending environment, but you saw the G to P growth numbers this morning, etc.

I think that the demand we saw in September is continuing in October, and we're cautiously optimistic that it continues in November and December.

And what would you -- would you speak a little bit to the product mix?

The categories -- what do you see out there in the second half of the year?

Specifically in the mix, you know, we've been jockeying in the mix back and forth a little bit, but looking over an annualized basis, it really hasn't changed that much.

Specifically with the mix, we've been jockeying the mix back and forth a little bit.

But if you look over, let's say an annualized basis, it really hasn't changed that much.

Specifically with us, with some of our larger corporate customers, a couple of big orders here, cut-off date, quarter and etc., can really jockey those numbers a percentage point here or there.

But overall, we're starting to see supply tighten up a little bit.

Specifically in flat panel displays.

A lot of manufacturing output has really gone to the plasmas, the 42-inch for customers, specifically for the Christmas season.

So we may see some price increases in the flat panel displays and/or actually some shortages, especially in the lower end 15-inch displays.

Overall, I think that for the first time in a while, demand and supply are coming together, and we no longer have a huge supply glut out there across the board.

So I think it's actually a positive thing for everyone.

And last question: Would you just comment -- once we get to this time next year and most of this integration is behind you and you get through, what does it really mean for an account executive that's taking orders that the new system is in place and how much more productive can they be?

Can you look at it?

Or what's the measuring stick to look at that?

Well, this is -- it's hard to get our arms around it, quantify it, but this is the next big leap.

If you think about it as an example, our order entry under our Max system, it was front loaded the same for 14 years, you know, some enhancements here and there.

This is the next big jump.

A graphical use of interface, right mouse click for data.

Doesn't seem like a big deal maybe if you've been using Microsoft Windows or Excel, but we were really using green screens and a totally different way of doing order entry than let's say the new -- the 90s and 2000's.

So we look at this as a major league league increase, and the next couple of quarters, we'll hopefully be abel to give you more specific data on just what kind of a productivity increase we've seen.

But we're looking for substantial, but we have not seen anything yet.

Obviously, because we're just implementing right now.

Great, thanks, guys.

Thank you.

Your next question comes from Chris Hussey of Goldman Sachs.

Proceed, sir.

Good evening, Tim and Stan.

Good afternoon out there, I guess.

Hi.

Questions for you on -- let's start with the account execs.

When you look at your year-over-year revenue decline, this is actually the first quarter I guess where we can really look at it, and we don't have to worry about what [Coal Mark] was doing or anything like that.

It's like for like.

You're down 15%.

But your U.S., your North American account executive base declined 18%.

You know, so you can make a claim it's kinda' self-inflicted here.

Your sales per average account executive week output would be up to 1,930,000.

That's the highest level you've ever achieved in a quarter.

What prompted you, now that you're seeing this -- suddenly resurgence in tech spending and in activity, to cut your sales force so sharply in the quarter, given that it seems like you are finally gonna need those sales guys?

Well, let me talk specifically to that, because -- let's talk sequentially, because I think it's much more comparable.

One of the things, as we move into a new model, which is not just about product sales, but it's about single source and total solutions for the customers, of product and services, and really wrapping that together in a solution format for the customer.

Some sales executives cannot make the move or are unwilling to make that move.

As an organization, this is the strategic direction that we're heading.

So most of those departures were either by their choice or by us asking them because they were not performing at the levels we deemed necessary.

One of the things we're doing as we move the business forward is we're asking for more performance out of our sales force.

Although we're still recruiting actively, we're taking up those individuals that are either incapable or unwilling to move the business forward.

And also, we have minimum targets now that are much more aggressive than I'd say maybe they were a year ago.

So, this is an active choice by us, and if you look at our numbers right now, especially among the seasoned executives, we're actually increasing our tenured executives three years-plus, fairly dramatically over the last few years.

So we view this as a positive.

And because of the new tools and everything else we're doing, we view an existing account executive to be actually able to handle more accounts than they did before.

That said, if we can find good account executives and we still are, we're gonna continue to actively train and recruit and increase the total number of account executives.

I think we somewhat hit equilibrium right now on that number, so we would like the number to go up.

With that said, if a performance isn't there, we not going keep numbers just to keep numbers.

All right.

Fair, but you know, this is a little bit of a numbers game though, too, you know, to the extent that we start seeing an increase in demand for product, you kind of -- don't you need more sales people to fill that demand?

We are actively recruiting right now.

But that said, over the last nine months, we have gone specifically out to the account executives that we didn't think could make it long-term with the organization.

And now you have an account executive pool where you feel, all right, you've gotten rid of that group, and the group in there can do the total solutions?

Absolutely.

And if you look at -- as you pointed out, our sales per account executive are up fairly dramatically, especially if you look at it sequentially over the last few quarters.

So I think we're actually in a great place with our core sales force right now, and I think if you talk to them specifically -- whether it's our new custom landing pages, some of the capability we have, I think we're really unmatched in the industry right now with that capability.

So I think from their perspective and certainly from my perspective, I think we're in a great position right now.

What can we expect as we think about growth potential, you guys going forward?

From here on should we expect you now to be adding sales people, you know, account executives, or should we think don't be surprised if you see you're down another 20 in the fourth quarter?

I would certainly like to be up, but again, this is going to be based upon how many we can recruit and the performance, but we would like to be up.

If all things equal, you know, we're planning on being up, but again, we can't guarantee it.

Remind us of your lag year, if you hire a guy today, is he called an account executive in your definition immediately, or does he come in with lag time?

Immediately.

And how quickly do they really start producing, though?

It's really three or four months, depending.

But, also, we should point out this is one of those things with all this stuff, this is an individual -- this is September 30th.

A new class has started in early October, A traditional date would not be included in those numbers.

So, you need to look at this on an overall basis.

Did you have a big October class?

We didn't have a huge class, but we did have a class.

Let me switch.

Question about the management.

A little bit of a management shuffle.

Explain to me what you mean by, you're looking for this to fill the President's position again.

You know, it seems like Dino is managing everything but Direct Alliance, and you're managing Dino.

What does this guy do in between you and Dino?

First of all, if you look at specifically what we said, it may include that.

One of the things we're doing over the next year, especially as we've grown so large, what we're trying to do is we're going to out there and increase our breadth and depth of our management team.

We don't want to go out and say we won't add this position or will add that position.

We really want to keep ourself a little flexibility there to see who we can find, who's available out there.

If anything, over the last couple of years, I think given the growth, we need to have more depth in our management team.

So we're gonna go out there, and if you want to call it beat the bushes, and see what we can find in the next six months to a year, and then make moves based upon that.

So things may shuffle again, based on who we add.

But we think adding breadth and depth will be good for our organization, especially from the outside.

Does your role change at all with this new position being filled there or --

Well again, you know, I think my role is the same right now.

It depends on who we find.

Again, it may only be one individual.

It may be a couple of individuals in different roles, and then we would re-swizzle our management team based upon that.

But I think right now , we've got a very strong management team.

We've got Tony back focused on Direct Alliance, one of the new business side of that.

We've divided up the roles between the top executive team, so I feel very comfortable of where we're at right now that we could operate effectively going forward.

But that said, all things equal, I would like to add power to our pool of executives.

Okay, I don't want to be a question hog.

Two last questions.

Stan, maybe if you can -- the tax rate issue.

Can you give us guidance for the fourth quarter and beyond?

Does this UK thing go away?

I know I could probably figure it out if I read it carefully enough.

And then on the options, it looks like you've gotten with your price -- with your stock up nicely that you're getting a share creep here as you'll probably have to account for options coming into the money.

What should we be thinking about for the share base for the fourth quarter and beyond?

Okay, Chris, first of all, in terms of the tax rate, it was an unusual drop this quarter.

I think it's going to come back up in Q4 to the level of 37%, 38%, somewhere in that range.

In terms of the options, again, with the increase in share price, then that brings in some solution, probably from -- if you notice this quarter from last quarter it went up about a million.

I think in modeling, you might want to take half that amount, depending what you really consider the price of the stock is going to do.

But I definitely think -- and knock on wood -- that it will increase over Q3 total.

Should we be thinking -- is there another threshold?

I mean, if your stock -- I'll just throw it out -- if your stock hits 20, do you add another million shares, or is there nothing like that, it's just sorta gradual?

Yeah, it's really gradual, and again, if you go back historically and kinda look how we went up 200,000 to 400,000 shares a quarter when the stock was kind of moving upwards, that's kind of a good trend.

The reason I said to take half of that amount is just being on the conservative side.

Half of the million that we did this -- so 500,00 would be kind of a conservative number.

Thanks very much, guys.

You bet.

Thank you.

Your next question comes from Brian Alexander of Raymond James.

Please proceed, sir.

Hi, just a question on the SMB sales decline.

You mentioned a couple of non-recurring events there, moving some customers over to the large corporate segment and then also distractions from the systems side.

I guess I'm just trying to understand if those two events did not happen, what do you think your SMB sales would have done in the quarter?

Again, I mean, we're talking few percentage points.

I think it would have been flat sequentially the same.

So on, specifically, we look at it as insignificant, but we wanted to point that out specifically on that.

But we really don't think there was any change in the SMB sales number if you take those two things out of there.

I guess you said earlier you were pretty confident that the sales tax is not having an impact.

I guess the way I think about it is the larger the customer base you have, the less likely that's gonna have an impact.

So when you say that your SMB customer base is, you know, between 100 and 1,000, should we be thinking that, you know, the majority of that is closer to 1,000, or is it closer to 100?

No, no, no, no.

If you look at -- we think our sweet spot is 300 to 500 in terms of where we'd like to be, but on that, if you think about it like this: Ask any business with 100 employees.

Every one of those businesses, without almost exception, pays use tax if they leave the year, they get audited by the state, etc.

They're the size at which they're on the state's radar screen, whatever state they're in.

If they're in California, there are 25 seats in the state of California, all after them for revenue recognition purposes.

So, when we look at that, almost every business to a material size, even at 100, is definitely paying use tax, and those are the kinds of customers saying, Hey, it's easier for me to pay sales tax up front and not have to go back and calculate use tax after the fact.

To follow up on that, and I don't know if you can answer this, Tim, but why would you suppose that some of your direct marketing competitors that have similar customer mix are not moving in that direction and charging their customers sales tax?

Well, there's a couple different answers.

First of all, if you look at our strategy of single source production services -- services specifically are a very tangled web in which you quickly get sales tax exposure.

The other side is we think if you look at the internet sales tax ban that Congress put in place, etc., at some point that's gonna come to an end.

We think we're being very conservative in terms of eliminating a potential liability by collecting sales tax.

At some point that game is gonna end, so some of our competitors are going through legal through hoops, so to speak, where certain entities collect sales tax, other ones don't, etc., etc.

In the end, we think it's more conservative and better for everyone to go out and collect sales tax specifically.

The other one is that on this -- I said is, overall, we don't think it has a material impact.

Certain customers were not doing business with us because we didn't collect sales tax.

Others customers have said, No, we don't want to do business with you.

Net/net, we think we're roughly in the same place.

Okay, I appreciate that.

I guess looking into the fourth quarter, if the sales tax is not having an impact and you've seen a pretty good October here, you know, what should we be thinking about in terms of -- let's just say that the fourth quarter is a seasonal quarter.

In terms of sequential growth and your SMB customer base and then also in your large corporate customer base, would we expect to see a faster rate of growth there because they're more prone to a budget flush, or how should we think about growth from Q3 to Q4?

If you look back historically, Q4 is always a pretty good quarter, just in general, especially on a sequential basis.

If we see the same increase in demand that we've seen in September and October, then, you know, it only goes to reason that our sales would be up sequentially in all customer segments in Q4.

SMB sales have been particularly strong in October, but then again, this is one month of three, and what we've got to do is go back and, obviously, again in the quarter, and figure out exactly where we're at.

And, Brian, this is Stan, always the negative person over here.

Keep in mind in October and November and December, there's fewer ship days.

You've got holidays coming up.

And the other thing that I would caution when people are looking at their models, is that, again, what we're doing in terms of the integration is training our account reps during the fourth quarter, and human nature would tell me there may be some slowdown from that perspective in going through that training.

So, you know, the things that Tim say are absolutely correct about the environment, but keep in mind the other two, the fewer ship days and the integration process that we're going through when you're determining where you think that quarter's coming out.

And that would be more impactful on the SMB side than the large corporate side, right Stan?

Yes, it would, because that's the one that's migrating over to Maximus in the fourth quarter.

So again, I don't -- you know, I'm just pointing out these other things.

I agree with Tim totally, that, you know, October started out well, particularly in comparison with the first month in Q3, but you do have fewer ship days in November and December.

We all face that.

Okay?

Yeah, and then finally, on the gross margin change in the quarter.

I was a little bit surprised to see that one of the reasons for the decline was a lower mix of services.

I thought that was part of the strategy in terms of penetrating your SMB customer base with services that you inherited through the [Coal Mark] acquisition, so was that a meaningful part of the change there?

Maybe just give us an update us on your ability to cross sell or penetrate your SMB customers with those service offerings.

Actually, let me quantify that a little bit more.

Our SMB service sales were actually up sequentially.

It was in the large corporate side, where we had some contracts run out and that for mutual reasons, some our customers, some our own, we did not renew some of those.

So that's the reason why our revenue basis -- that number was down.

But actually on the SMB side, service sales were up sequentially.

So, we are starting to get a lot of traction there, but again, over a long period of time, it will take many quarters for that to really be a big, material number to the outside world, so to speak.

And, Brian, this is Stan again.

Just from my point of view when I look at it, I think there's potential tremendously to sell services into the SMB, but, again, everybody has been focused with this integration.

That is certainly an area that we are going to focus, and I believe take advantage of, in 2004.

So I think there's wonderful opportunity to get that into the SMB, but, again, because of this conversion coming through in Q3 and Q4, you may not see the immediate impact, but I would hope to see that in 2004.

Okay, this will be the final question.

I apologize if this was asked before, but, Tim, under the scenario where you're able to beef up the executive team, how would your role change under that scenario?

It depends on who we add and how many folks we add and if we can find anybody.

I think it would be a combination of all of the above.

It's one of those things where if we can add executive depth, I think it's a positive for the organization.

You're not planning at this point to take on any less of a role, you know, going forward, are you?

As far as I know, I'm still signed on the statement personally. [ LAUGHTER ]

Fair enough, thanks.

Thank you.

Your next question comes from Bruce Simpson of William Blair.

Please proceed, sir.

Hi, good afternoon.

How we doing?

Good.

Just following up on a couple of the prior questions.

First, I just want to make sure I understand kind of the breakout of revenue across business segment, and I know you don't like to do it in much specificity post [Coal Mark], but whatever I can get is great.

So I think I understand that SMB general is flattish to slightly down on a sequential basis, that large corporate, I guess, therefore, is sort of flattish on a sequential basis?

Is this consistent with what --

Just is slightly up.

Again, we're talking very, very small numbers here on SMB and corporate.

And, then, Tim, you mentioned just sort of in passing the public sector is small enough to not really move the needle.

Obviously, this is the quarter that public sector casts the biggest shadow.

Can you talk about whether there is a seasonal impact to the positive in your public sector business, and can you give some sense of percentage or total dollars of the revenue flow from public sector?

Go ahead, Stan.

Basically in the public sector, we were up approximately about 8% sequentially quarter to quarter, which you know, is certainly good, but, again, because it's a small portion of the total, it really doesn't move the needle that much.

So that's about as specific as I can get, Bruce.

Okay.

And then also, trying to continue on a little bit on the SG&A cuts.

I think in response to Dave Matthews' question, I believe the answer was sort of with this revenue level we have now hit kind of a good full-quarter bogey for SG&A dollars?

Is that right?

Or will you anticipate -- I'm a little lost as whether -- I understand you think you got more savings after we hit 1104.

In the fourth quarter, are there still more savings from the roll-off of stay bonus and so forth, or is it flat to the third quarter as it looks today?

In the fourth quarter's probably pretty flat with what you have in the Q3.

In Q1, though, we did outline approximately $3 million at a minimum of savings coming in from there.

Additionally, I would say, Bruce, I will repeat, you know our long-term goal is certainly to get to 7 1/2% to 8 1/2% operating expenses, percentage in net sales.

In order to do that, either sales are gonna have to pick up, or we're going to have to take out more cost that we think we can do.

So over that period from Q1 onto Q4, there's certainly more savings, be it from adjustments on sales or cost takeouts or efficiencies from the new IS system, which is kind of hard to quantify right now, but understand, long-term, that's our goal to get to it.

In your modeling, I think between Q2 -- or Q3 and Q4, there isn't much more takeout, but it will happen in Q1.

Okay, then a final question.

Let's talk about gross profit within the product base in particular.

You outlined in your press release the impact of services, but focusing within the product base, were those sequentially lower?

And if so, can you give us a little more specifics as to what is impacting that in the competitive landscape?

Is it rebates being cut, so forth?

It's -- you know, this is Tim.

It's a combination of everything.

Part of that is, is that also, is that, you know, you had a few basis points and loss in gross margin there.

Part of it also is in a little bit of everything.

Little bit can be as simplistic as a large corporate customer on one individual contract, next to an individual product, but also as we're merging the systems -- if you think about gross margin, part of it is demand-driven.

Part of it is what we price it at.

As we're combining some of that, let's call it refining how we bring our gross margins together.

So it's one of the interesting things where as I look at where we're at right now with gross margins, we're -- I wouldn't say -- we're not optimizing as well as we should be, because part of it is we're merging between the systems, and some of the times the costs or how we calculate what we're gonna charge between systems gets modified.

So as you look over time, I'm hopeful that we can increase gross margins, not only over Q3 levels, but also in the Q2 levels over time.

Even without bringing in the higher margin from the services.

So, this is, you know, in my mind the combination of customer-driven, but also the systems coming together and how we're managing those gross margins.

Okay.

I know I said that was the last one, but I cheated, I got one more.

It has to do with the mix between a unit growth and pricing within the product side of your business, particularly with respect to SMB.

CBW broke the south for us, and it looks like there's fairly heavy price compression year-over-year, particularly in laptops and desk tops.

Can you give any kind of comment about what sort of price compression you're seeing in your major product categories, and whether that seems like it's getting better or worse, and where it comes from?

There's no doubt specifically in the notebook category over the last 12 months -- you know, sequentially, I don't think it was that bad, but year-over-year notebooks had significant price compression.

The good news about it is that we saw unit volumes, obviously go up accordingly, but overall, that's kinda what my comment earlier was geared towards -- I didn't exclusively say it -- what are supplies meeting demand.

For the first time, we don't have just drastic oversupply in a lot of these categories.

In some of the areas, let's say a year ago, it was -- maybe even 45% over capacity in some of these product categories, where the factories were having a spindown dramatically.

Right now, we're finding more the first time in many, many quarters, seeing those supply and demand meet each other.

So I'm hopeful on that side that we can actually see a decrease in the ASP drops over the next few quarters just because of that.

Overall, I think a lot of compression has already been taken out.

Notebooks -- if you look at it -- desktops led notebooks on that drop, but desktop compression is somewhat stabilized now, where notebook is -- let's say come back in line and caught up with desktops.

But I would not anticipate in either of those two categories, which are really the biggest categories over time, seeing a lot more price compression.

Is Dell a significant factor in price compression and those categories or as newer categories?

Dell's a significant competitor in the three big ones: desktop, notebooks, servers.

Specifically, in 4-wave and below on the server side, but Dell has a tremendous impact in driving the whole industry, not just us, in terms of average sale price, without a doubt.

Thanks.

Thank you.

Your next question comes from Walter Sozalski of John McStay Investments Investment Company.

Please proceed, sir.

Good quarter, guys.

I think you partially answered this question, but I'll go ahead and ask it again.

You mentioned the month of October, it started strong.

Can you give us a little color on where you're seeing that strength?

It's really across the board.

Specifically SMB is doing a little bit better than corporate, although we believe that corporate's gonna have a good end-of-year just because of budgets and the year-end, but it's really across the board right now.

Okay, also UK and DAC as well?

On DAC, you know, we don't specifically discuss specific programs on that, but demand over the UK is also doing pretty well, also.

But, again, Q4 is traditionally a tough quarter in the UK because the way the holidays fall, etc..

In the U.S., Q4's usually really good, whereas Q1 might be a little bit sluggish.

It's the opposite in the UK where Q1 is a good quarter, and Q4 falls off because most of the country takes December 15th on, off.

Great, thanks, guys.

Your last question comes from John Lawrence of Morgan Keegan & Company.

Please proceed, sir.

Yeah, Tim, just a follow-up on DAC.

Strategically, Tony going back to head that up, any strategic changes? marketing agreements? how that business is gonna grow going forward?

We have some new strategies on it that we've been doing.

We had a new program last quarter, couple new things we're doing.

We think we have a good formula there going forward to really grow that business dramatically.

So that's a reason why I think that it really benefits the overall business to have someone of Tony's strength and experience over there really leading that.

So we're very excited to have Tony back at Direct Alliance.

Does that include new verticals or staying within current industry?

A combination of all of the above.

We really believe we're in a good place there.

One of the good news, or bad news about large clients is they do very well, make a lot of revenue, but you end up with probably too much revenue focused on a handful of guys.

We think diversifying that over a long period of time is good for the business.

All right, thanks, guys.

Thank you.

On behalf of Insight Enterprises, thanks for your support.

To all inside employees, especially those in IS and Web around the world, thank you for your hard work and dedication, and special cudos to those who have made and continue to make our business integration and Maximus conversion successful on all parts of the business.

Thank you very much, bye-bye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.