Insight Enterprises Inc (NSIT) 2003 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the fourth quarter 2003 Insight Enterprises, Inc. earnings conference call. (Operator Instructions).

I would now like to turn the presentation over to Mr. Stanley Laybourne, Chief Financial Officer.

Please proceed, sir.

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

Today we will be discussing the company's operating results for the quarter ended December 31, 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 we've posted this afternoon and filed with the SEC on Form 8-K, you will find it on our Web site at www.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 Web site.

An archived index copy of the conference call will be available at approximately two hours after completion of the call, and will remain on our Web site for a limited time.

This conference call and the associated Web cast contain time sensitive information that is accurate only as of today February 5, 2004.

This call is the property of Insight Enterprises, Inc.

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

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

All forward-looking statements that are made in this conference 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 quarterly report on 10-Q for the quarter ended September 30, 2003.

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

Tim?

Thank you Stan.

Hello, everyone, and thank you for joining us.

I'm pleased to report today that Insight Enterprises saw its 3rd consecutive quarter of sequential growth in net sales, net earnings and earnings per share.

I will provide a brief overview of our fourth quarter 2003 performance trends and news reach of our operating segment and Stan will provide an overview of our financial results for the quarter.

Beginning with North America, we are pleased to report that net sales and net earnings from operations were up sequentially with growth areas in small to medium businesses and to an even greater degree large enterprise customer groups.

These increases were offset slightly by an expected seasonal decline of public sector sales.

We continue to be guardedly optimistic as net sales again increased sequentially and we continue to see increases in the amount of RFPs and purchase orders, reflecting a moderate yet evident increase in demand from both our SMB and our large corporate customers.

Activities occurring most noticeably among desktop consumer product categories, which is expected as companies initiate long overview refresh cycles.

We are continuing to see increased demand for security-related products and services across all customer groups.

We're pleased to report that we continue to experience no material negative net effect on sales attributed to the collection of sales tax.

I'm extremely pleased to report that we have successfully completed our IT systems integration and our new Maximus System has been deployed across all of Insight's operations serving the United States, customers including our account executives based in Montreal that are selling into the United States.

This was an extremely complex integration and was accomplished with only modest disruption to our business.

During the month of January, we completed a refresh training and conversion of our SMB account executives in Tempe in Montreal for Maximus.

We believe our decision to postpone the majority of the migration initially scheduled for December of '03 to January of this year allowed for account executives to focus on sales during the last month of mid quarter and the year and to focus on the conversion to Maximus during January, a typically slower first month of the quarter.

As anticipated, we've already begun to realize cost savings from departmental consolidation and increased efficiencies, which Stan will discuss in greater detail later.

With this long anticipated milestone behind us, I would like to congratulate our technical staff, integration management teams and our entire organization on a job well done.

And I thank our employees for embracing the technical process changes and business changes we have implemented in the business.

We now have the ability to provide increased levels of customer service and in-house service capabilities to make IT total solutions available to business customers of all sizes on a national scale.

This latest step in the evolution of Insight represents an exciting new opportunity for us to go out and reach new customers and offer greater value than ever before.

We plan to introduce the Maximus system into our UK and Canadian operations in 2005.

This will enable us in 2004 to focus our IT resources and business resources on enhancing and optimizing United States systems business processes so that we can convert the U.K. and Canadian businesses to Maximus, we will have the system optimized at maximum efficiency based upon the changes in the U.S. system during 2004.

With the systems conversion behind us, our top four priorities for Insight North America in 2004 are the following.

Number one, improve customers service through metrics.

With the Maximus System, we have the capability to drive metrics into every aspect of our business.

And we will use these metrics to increase performance and efficiencies in every department.

Number two, grow the business.

Our internal slogan for 2004 is 'Insight out'.

We plan to turn all the resources that were focused in the last two years internally on the integration of the acquisition and conversion to Maximus towards growing the business.

Number three, marketing, branding and demand generation.

We plan to increase our investment in building our brand and creating demand not just via sales force additions but also by using traditional marketing vehicles.

Number four, Web site integration into our business process and our business model.

With our new IT platform and our new Web site, we can further enhance the quality and functionality that we have on our Web site.

We have focused on making the customer experience whether it's been the phone, face-to-face or Web as soon as possible.

We believe that Insight is very well positioned to take advantage of the position in the marketplace in 2004 and beyond.

Depending on net sales increases during 2004, and realization of additional cost savings synergies, we will further invest a portion of the upside into these four areas of the company.

While we are focused on increasing net sales and net earnings in 2004 we are also focused on growing the business beyond 2004.

This brings me to Insight U.K., which saw its fourth consecutive quarter of operating profitability and owes to the sequential increase in both net sales and earnings from operation.

Last quarter, we announced that Dino Farfante, President of Insight Direct Worldwide, will be working to unify strategies under the Global Insight brand.

We are also successfully positioning Insight as a single source provider of IT products and services in the United Kingdom to focus on small to midsize business customers.

As in North America, Insight U.K. also offers an extensive array of service capabilities and maintains a number of service level agreements, which means we can manage all aspects of projects for our customers, allowing them to concentrate on their businesses.

The most significant difference from our North American business at this time is that services in the U.K. are coordinated through a network of outsourcing partners.

This structure is similar to many direct marketers in the United States who are entering the services arena.

2003 was a turning point for Insight UK, and we are very pleased with the results we've achieved in the past year.

Not only has Insight UK shown a significant improvement in 2003, I believe it's well positioned for continued growth in 2004.

This brings me to Direct Alliance, which saw relatively flat net sales in the fourth quarter compared to last year, yet continued to provide strong operating profit.

Direct Alliance continues its business development efforts and has been successful in adding several new small clients and programs.

While we are excited about the opportunities with some of our newer programs, new programs require some time to achieve noticeable growth and profitability.

Direct Alliance offers a compelling customized service that enables manufacturers to sell directly to consumers or support existing indirect sales channels in a cost-effective and timely manner.

Tony Smith is now spending full-time as president of Direct Alliance and is focusing 2004 on business development and delivering that message to Direct Alliance target markets.

PlusNet.

PlusNet continues to have stellar performance posting strong growth in both net sales and earnings from operation, as UK customers continue to embrace broadband technologies.

PlusNet continues to be a leading low cost provider of broad brand in the UK and market is responding to that.

PlusNet has received several industry accolades in the UK and was most recently named the winner of Internet magazine's best ISP on the planet annual award, featuring the publications December 2003 issue.

The magazine deemed PlusNet the clear winner for its consistent quality of performance and wide range of products at impressively low prices.

As of January 31, 2004, PlusNet has more than 50,000 broadband customers.

Well, PlusNet continues to service a large number of dial up customers as well, the long-term value of PlusNet will be driven by the growth of the broadband customers.

I will now turn the call back over to Stan to give you some more specific financial actual results for each operating segment.

Stan?

Thanks, Tim.

Since substantial detail and year-over-year comparisons are included in the earnings release, I will focus my discussion on fluctuations from last quarter.

Let's begin with Insight North America.

As Tim stated, net sales increased 2% over last quarter the number of account executives was reduced by approximately 14 during the quarter to 1,194.

Although we plan in 2004 to start adding account executives each quarter to meet demand.

Currently we expect to add approximately 50 net account executives per quarter combined for North America and the United Kingdom.

Average tenure for our North American account executive is up from 3.2 years last quarter, to 3.3 years with 27% of the account executives having less than one-year experience, 13% with one to two years, a 11% with two to three years, and 49% with more than three years.

Gross margin decreased slightly this quarter to 10.8%, from 10.9% due primarily to a temporary system pricing issue, which we believe contributed a loss in gross profit of between 500,000 and 750,000 during the quarter.

During the migration of one group of account executives to Maximus, the system displayed slightly inaccurate cost, which were used as the basis for pricing.

The issue was quickly identified and has been fully resolved.

Additionally, we recorded some increases in our write-downs of inventory in conjunction with the increase in inventory balances.

These decreases in margin were offset partially by increases in freight margin and supplier discount and an increase in supplier reimbursements partially attributable to the cooperative advertising related to the Insight.

Selling and administrative expense as a percentage of net sales decreased sequentially to 8.7% from 9.1%, due primarily to cost savings associated with head count reductions of redundant staff, reductions in stay bonuses and decreases in training expenses.

Last quarter we stated that we expected approximately $1 million of personnel savings in Q1, 2004, compared to Q3, 2003.

Approximately $500,000 of this $1 million in planned savings were realized in Q4.

These decreases in personnel expenses were offset partially by increases in depreciation expense as we started depreciating the Maximus system during the quarter.

As we have previously stated, additional cost savings for migrating Insight's US operations to one common IT platform will be realized in Q1, 2004.

As Tim stated earlier, we are very pleased that the system integration has now been completed and support departments are all consolidated.

As a result, the following quarterly expenses in Q4, 2003 will not be incurred in Q1, 2004. $1.7 million of accelerated depreciation related to the old IT system. $182,000 of stay bonuses and an additional $500,000 in personnel expenses.

However, as Tim stated earlier, we expect this additional savings to be partially offset by investment in the business for growth in both North America and the UK, including increases in account executive head count of about net 50 per quarter as stated before, and marketing expenditures.

Additionally, although new business is currently processed by the Maximus system, the prior IT system will be maintained until all old transactions such as accounts receivable, sales returns and accounts payable are fully processed in the normal course of business.

Of course, we expect eventually to realize additional efficiencies as our employees become more proficient on the Maximus system, and additional enhancements are made.

Long-term it is still our goal to reduce our consolidated and selling and administrative expenses to between 7.5% and 8.5%.

I believe this goal will be achieved for Insight North America, by the end of 2004, but will be a longer-term goal for the consolidated group.

To achieve this target percentage, we need to experience an increase in net sales, realize additional operating efficiencies from Maximus, implement additional cost cutting initiatives, or a combination of this three.

This now brings me to Insight UK.

Net sales for the quarter increased sequentially to $99 million from $96 million in Q3, 2003, with increases in the British pound sterling exchange rates from last quarter accounting for $5.6 million of the increase.

Excluding the effect of fluctuations in the exchange rate, net sales decreased approximately 3% due to seasonal declines in business during the year-end holiday season.

The number of account executives was reduced by approximately 36 during the quarter, to 232 with these reductions due to performance.

As I stated earlier, we plan in 2004 to start adding net account executives each quarter, approximately 50 per quarter combined for North American and the United Kingdom.

The staff reductions resulted in average tenure of our United Kingdom account executives decreasing from 2.4 years last quarter to 2.2 years with 50% of the account executives having less than one year experience, 11% with one to two years, 13% with two to three years, and 26% with more than three years experience.

Gross margin increased sequentially this quarter to 13.5% from 13.0%, due primarily to the decrease in the writ-downs of inventories, increased supplier reimbursement and freight margin, offset partially by a reduction in product margin.

Selling and administrative expenses as a percentage of net sales decreased sequentially to 11.5% from 11.7%, due primarily to the reduction in account executives and the increases in supplier executives and increase in supplier reimbursement that offset catalog expense.

Insight UK continues to contribute positive earnings and from operations and posted a 62% sequential increase to $2 million.

Direct Alliance posted net sales of 19.1 million, basically flat from the 19.3 million last quarter.

Net sales decreased primarily due to a small re-seller program that changed to a service program this quarter, with net sales representing service fees rather than gross product sales.

Offsetting this decrease was approximately $461,000 recorded in sales and gross profit due to a client program yearly performance guarantee recorded in the fourth quarter of 2003.

For the three months ended December 31, 2003, Direct Alliance's largest out sourcing fine accounted for 66% of Direct Alliance's net sales, and the top three clients represented 93% of net sales.

Direct Alliance's gross profit increased to $887,000, or 16% to $6.3 million for the fourth quarter of 2003, compared to $5.4 million in the third quarter of 2003.

The increase in gross profit is due primarily to the $461,000 of client program yearly performance fee guarantee just discussed, and increased performance fees offset by the smaller reseller program that changed to a service program this quarter where selling and administrative expenses now reported as costs to goods sold.

Selling and administrative expenses at Direct Alliance decreased 10% to 1.5 million for the fourth quarter of 2003, compared to $1.7 million last quarter, due to the small reseller program, the change to a service program this quarter, with selling and administrative expenses now recorded as cost to goods sold and some cost cutting measures.

Direct Alliance posted earnings from operations of $4.8 million for the fourth quarter of 2003, a 29% increase compared to earnings from operations the $3.7 million last quarter.

PlusNet continues to experience a steady increase in net sales, as U.K.

Internet customers continued the shift from Dialup to Broadband Internet access.

Active broadband customers increased 34%, from last quarter to 46,523, and as Tim stated, has increased over 50,000 at the end of January.

PlusNet's net sales grew 26% sequentially to $8.9 million, and earnings from operations grew sequentially 11% to $925,000.

Increases in the British pound Sterling exchange rate from last quarter, accounted for $500,000 of the increase in net sales.

Cash flows from operations were strong during the year.

The outstanding balance under our line of credit in accounts receivable securitization facility increased to 65 million from September 30, 2003, due primarily to paying off approximately $11.9 million of building mortgages, increases in inventories, and reducing accounts payable.

We also had approximately $42 million in cash and cash equivalents at December 31.

Associated with the payoff of the mortgages, prepayment penalties of $628,000 were also paid, and capitalized loan origination fees of 173,000 were written off.

Both of these amounts were recorded as non-operating expense during the fourth quarter.

Based on the current interest rates under our financing arrangement, the expected interest expense savings will exceed the prepayment penalties and write-off of capitalized loan origination fees in less than one year.

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

Tim?

Thanks, Stan.

Over the past 18 months Insight has weathered a challenging environment and we kept our focus largely on internal improvement.

During this time we transformed our business and championed a growing trend of the industry to transition beyond strict product fulfillment to include service offerings to customers.

This has been an exciting change for Insight and as we enter 2004 we are focusing our full attention outwardly to deploy the value of our single source business model solutions going to the approach across all of our customer segments.

Because of practice offering both products and services is growing trend in the marketplace I would like to provide examples to help illustrate the tremendous strength of our in-house capabilities and which we believe are significant differentiators for Insight.

A project recently completed for a large pharmaceutical client is one example of how the full breadth of our in-house product and service capabilities were utilized for a total solution.

The objective was to deliver a complete technology refresh across a large mobile work force with minimum unproductive down time.

Insight took a unique approach to this solution by going on-site to a hotel where the customer sales force was attending training seminars.

At the hotel, we constructed a technology integration lab facility complete with network servers and a technical team.

The roll-out schedule provided data migration and laptop customization with PDAs for groups of 250 individuals within 48 hours twice a week.

Costs were minimized, no laptops were lost in transit, no sensitive data was lost and numbers of sales force were trained on their new (inaudible) before leaving the hotel site.

Therefore, getting them up to speed at a minimal time.

With this, a part of this customized laptops were rolled out over four months.

As a SMB customer left, a 100C realistic consulting practice recently engaged us to perform a technology assessment to discover, review and generate recommendations related to the existing infrastructure, ISP connectivity, land platform and database structure.

In two weeks, we generated a comprehensive report that resulted in an engagement to design and implement our recommendations.

Feedback from customers has already begun to show that our extensive in-house service capabilities are gaining traction in enhancing products sales in North America.

On a global level, we expect to increase awareness of our single source model and we anticipate that our sales force will become increasingly more effective at communicating and applying Insight's value proposition to our customer's IT needs.

Additionally, we recently announced the addition of Bennett (inaudible) to our board of directors.

Bennett brings you extensive background in business and finance and has significant part in board experience with fortune 500 companies including major companies such as Campbell Soup and Bank One.

Bennett will serve as a member of the compensation committee and a nominating and corporate governance committee of the board of directors.

We anticipate that Bennett's perspective will be valuable contribution to our board of directors and we welcome him to the board.

I would like to conclude today by saying that we're confident in our (inaudible) directions across all of our business segment.

And with continued momentum in IT spending, we believe that IT Insight Enterprises is well positioned for growth in 2004 and beyond.

That concludes my comments, Stan and I are now available to answer any questions which you may have.

[OPERATOR INSTRUCTIONS].

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

Please go ahead.

Good afternoon, guys.

Good afternoon.

Tim, first of all, let me say congratulations.

You mentioned weathering the storm for 18 months.

I'm sure that once you got into converting this saying, it was a, there were many down days but you ought to be commended for your leadership and executing and staying with the program.

So congratulations there.

Well, thank you.

Would you comment a little bit about the '04 initiatives a little bit.

You know, which one of these, as you wrap these together and just give us some ideas as far as the marketing programs and some of the things that you really think that what we've all looked at and known, that as you have this system that's more or less world class now, some of the examples in some of these initiatives to go forward and how they add to the top line?

Let me talk about a little bit from 80,000 in terms of where the business has been.

When we look at 2003, our number one are and really the only thing that we really cared about that I really drove in the organization was the fact that we had to integrate successfully, we had to convert the IT platform and we had to get everybody basically on the same wavelength.

By the way, we had to continue to sell, service and satisfy our customers, but our single most important item was the internal system conversion etc., So, from a revenue point of your profitability, I'm proud of those numbers, but most importantly I'm proud of the fact that we're able to unify the systems and the organizations and operations and procedures.

So, this really took the organization down to its core from the point of view of putting everything from both previous systems into the new system.

So, as I look at 2004, it's totally a different focus.

It's not number one, two, three, four, internally, it's one, two, three, four, externally.

This is all about growing the business and solving customer problems and making customers happy with customers retention issues in 2004.

So I think we're very well positioned for that.

We now have a system that allows to us unify all kinds of other subsystems and disparate systems and procedures that were either manual or really existing in spreadsheets before this into the main system.

So, this is why we're really focused not on upgrading the UK and Canada yet.

We want to optimize this system and not just the system but the procedures associated with it, to maximize our business and grow our business in the US, then we have this thing really tweaked up and move to fully modified system over to Canada and the UK.

And as you move forward and get comfortable with that, how much, more acquisitions come into play?

Well, let's talk about that overall.

As I look at our business right now, and have historically, we're neither for -- nor against acquisitions.

It really depends on the deal.

Although I will tell you in 2004 our bias is against acquisitions.

We really want to focus our business certainly.

We really want to drive what we already have.

We have a lot of work ahead of us in terms of really tweaking the system we have, fixing those little issues here and there and really keeping our people focused on growing the business this year, and on solving customer problems, making customers happy.

So that's kind of where our head is at right now.

Great, thanks again.

Thank you.

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

Please go ahead.

Yes.

Thank you.

Just hoping you can give us a little more color on the demand you're seeing in from your SMB customers and large customers.

Tim, you seem to imply that the large corporate spending is just beginning to come back.

I'm just hoping you can give us maybe just a ballpark of sequential growth in the large corporate side versus small medium corporate side.

And also, what are you seeing in the pipeline in terms of large projects, whether it be PC upgrades or other types of implementations you know that you're working on and may be compare it to what you saw a year ago?

Let me -- that's a big question, Matt.

Let me give you by start by talk about January.

In January as an example, we did not see growth in January in terms of what we actually shipped out the door.

But what we did see was an increase in the RFPs, requests for proposals, just the customer activity and most importantly the backlog of orders.

We've got a big open order import substantially up from what it was, so part of it is that we've got obviously ship that inventory out before we can recognize it, in terms of the orders, but I feel pretty good about where we're at right now from an overall demand perspective.

What I think is changed, versus '03 versus '04, is that customers right now are talking to us about buying more stuff.

In '03, there was a lot of time they wouldn't talk to us, didn't care didn't want even to hear from us.

So I think customers are willing to spend if they can prove the return investment, show that this is how this is going to increase the sales in their individual businesses, we're also obviously decreased cost increase productivity there up.

In corporate customers specifically, I think that if you read the IDC reports, some of the gardener news out there, there's a huge number of desktops specifically and notebooks that are four and five years old.

It makes sense.

In fact, I've heard numbers the size of third of all desks tops will get replaced in '04.

OK, who knows if that's going to happen?

We're in very uncertain times right now so, it's difficult rather to forecast one, two, three quarters from now and say, nothing crazy is going to happen in the world economy, nothing crazy is going to happen with the terrorist events or whatever.

But overall I'm very optimistic about where we're at because I don't feel if we have the wind at our face like we had in '03.

So I'm cautiously optimistic, as they say.

OK, great.

And just regarding the expense line, it looks like some expenses came out even ahead of schedule.

You talked about the savings expecting in the March quarter.

Just trying to figure out what the additional depreciation from this Maximus being fully ramped or at least mostly ramped will be and then also if you could give us an idea of the expected costs of ramping on new sales people?

Well, first of all, Matt, you're right.

We did realize this quarter, some of the savings that we had anticipated to not realizing until Q1.

We got about 500,000 in that -- in Q4 that we really thought would go into Q1.

Now, additionally there will be another 500,000 just personnel alone going, we expect in Q1.

In terms of additional costs in Q1, let me make sure that you understand, there was probably about another $2 million in Q4 that will not appear in Q1.

One of them being the accelerated depreciation that we saw as of 4/31 and the other being a couple hundred thousand in stay, which I outlined earlier.

Now, your question about what will be the effect of the new system in expenses, we really don't drill down that far, but I think it's easy to say that it's not material to your models.

It would really start making you, you know, have a blip in Q1.

It just isn't that material of an amount to affect your determination in your models.

In terms of the sales reps, becoming profitable, it takes a period of time for them -- well, let me back up.

There are two types of sales reps in our company.

There's certainly the corporate sales rep and there's the SMB sales rep.

Let me talk SMB first because that's our history.

We've had that for a long time.

It's very similar to a small business starting up, where it takes anywhere from 4 to 6 months in order to really be profitable and cover their salary.

After that, then we really start generating money on the bottom line.

So it takes a period of time for them really to ramp up on the SMB side.

On the corporate side it's a little more difficult to predict with any reasonableness when they really become profitable, because if you do have a very decent corporate rep join the company, he may bring a book of business with him.

Therefore, they may ramp out right off the bat and be profitable.

Whereas on the other side it may take a couple or three months in order to be profitable.

So in general, what I would probably do in your modeling since we've set said net 50 between the U.K. and U.S. you know, I would probably here on the conservative side being myself and model from a SMB type of approach and then hopefully there's some corporate people in there that hopefully bring a little bit more profitability earlier.

Does that help, Matt?

Sure.

Would that be in the 400,000, 500,000 range or?

400,000, 500, what do you mean?

In terms of additional costs as you bring them on line?

No, I understand.

Usually reps, again, this is from a SMB is anywhere from 25 to 30,000 a year initially, to start up.

Corporate reps are, again, depending on their experience, are more expensive but therefore they may generate or offset some money against it.

In your modeling I would probably go with the SMB model

OK.

Great.

One quick question regarding PlusNet.

You talked about selling it in the past what seems like a good little profitable business.

What's your plans there?

On first that - I think that we've talked about this for several years now, that long-term we certainly do not want to be in the PlusNet business.

I think that if you look at where we're at right now, versus, say, '03, the market sort of speak for ISPs is better from a business perspective and potentially from a seller spend perspective.

Long-term we don't want to be in the PlusNet business.

But we think it's a good asset.

We don't want to get out of it just to get out of it, so to speak.

That is still on our mind, definitely.

Okay, thanks very much.

Thank you.

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

Please go ahead

Hi, I wanted to clarify your goals for expense savings in North America Stan, that you mentioned before.

If we factor in the costs that are going to roll off in the first quarter, I think it was about 2.4 million that would get your overall SG&A ratio of about 9.05% and then by the end of the year, you think, you'll be down to that 7.5 to 8.5 for that was just a North American comment?

When I made that comment, Brian, that was just North American.

I definitely, our goal on IEI; is to get in there.

I guess, I'm just, right at this point willing to say that we're going to be there from an IEI point of view by the end of the year.

Hopefully, you've seen our track record in the past that we'd like to, you know, not necessarily over promise but rather you know, over perform and so hopefully, we'll have some good news, there but I didn't make the comment that we felt by the end of the year Insight North America would be within those ranges and that no longer it will, take us to (inaudible) IEI.

OK.

On, North America, did that also, that imply that you think you'll be at 3.5% to 4% operating margins that we've talked about before by the end of the year?

Well, obviously, you know as well as I do a lot of that depends on where you put GP.

We've told you that we think long-term that it can be anywhere from 11.5% to 12.5%.

And again, we feel pretty comfortable where it is right now.

It depends how you model that, but if you are at, depending where you put your model, you know, I think the numbers work out that it can be at 3% or plus.

OK, and then with respect to the system issue that you mentioned that had an impact on gross profit in the fourth quarter, that's totally behind us now and there wasn't any impact from that in January, is that correct?

Can you say that again, Brian, I'm sorry.

The systems issue that you had, that impacted gross profit by I think, 500 to 750,000.

500 to 750,000, that is absolutely behind us now.

We thought we'd bring it up because you know with any system conversion, you're going it run into blips, and we just happened to in one sales group that went over very early.

The thing I found encouraging is we had enough controls in place, etc., to notify us relatively quickly that there was a problem, and we corrected it completely, very, very quickly, and so the other groups that rolled out never experienced that problem.

And we won't see any impact in the first quarter from that?

No, no, absolutely not.

And Brian, let me clarify one thing.

When we were talking on the 11.5 (inaudible) 12% GP, I'm always looking at IEI.

So, if, keep in mind, that if you're trying to drill down to INI or something else, you know, PlusNet or whenever those are different GP numbers but I'm always looking at that.

Sure, and then I think, if we look at your productivity it's been improving, and I think part of the reason productivity has been improving is because your average tenure has been rising.

I'm just wondering, when you look at productivity by tenure, are you starting to see improvements in each class and maybe help us understand some of the improvements that you're seeing, some of the things that you're working on, to get productivity up?

This is Tim.

I mean, I think overall is, if I had it overall, one of the things I was disappointed with, I would like to have seen more growth in our account executives in Q4, but part of that was we did grow by actually hiring quite a number, but we also got rid of some folks that we didn't think were going to make it in the business long-term.

So, I think, the business decision was right, but overall I'd like to see the net account executives grow little bit faster that we had in Q4 specifically.

One of the biggest areas we have to increase productivity short and long run is really the Web.

How fast we can integrate a lot of the transactional type of orders or orders where the customers already expect that what they need and we've done what they desire and they're just placing the orders via the Web, that's an easy way to really increase the number of hours in the day for the sales executive, and really increase the portability.

So traditionally, that has been more impact full for the longer-term reps.

IE with a little bit more tenure; they've been more impacted by, that IE.

We're seeing more productivity on the longer-term reps than the shorter-term reps on average but that's not a huge difference between those two over multiple quarters.

And Brian, this is Stan.

I would add a couple other things.

First of all, you're right, as a rep becomes more experienced they're going to be more productive but I think, in terms of looking forward, you know, they've got a new system right now, and as they become more comfortable with this system, as we start to make even enhancements as Tim talked about in 2004 to the system, its going to those people more productive, which hopefully should add to the bottom line.

Additionally, a big thing that I don't think we can underestimate is the fact that for two years everybody has been focused inward and now these people, you know, don't need to learn training, they don't need to learn the new system, they don't need to get familiar, what is their job in jeopardy because of the integration or whatever.

They can start focusing on the customer again, and I think that's going to lead to productivity also.

The other thing that I guess a third one that I would throw in there also, is our feedback without a doubt on this new system, the rep user interface, the front end of the system has been extremely good from our reps and if that is in fact the case, which we believe it is, I think that's going to increase productivity too.

So all of these things I think in 2004 could come around to help us from a rep productivity point of view, and hopefully you know, materialize on the bottom line.

Stan, just I guess to wrap up this question and then I'll let the next caller ask.

Do you think, and obviously it won't happen this year but over the next couple of years now that you have a new system, new tools, you're spending more on branding, is there any reason why the Insight rep can't be as productive as the CDW rep?

Well, I mean, my goal is not ever to just equal, it's always to exceed, as they say.

But it's one of those things where sometimes when you have different models and everything else, it's hard to come out and say that.

We have got some of our top reps that are unbelievable, but I think overall just in general, we want to increase the productivity of our sales force without a doubt.

And Brian, I would add a couple other things I guess on this.

First of all, you know, from what I have read from people, and the various reports and everything, CDW does have a different model than us in that they spend a lot more money on marketing than we do, and marketing drives sales and as a result of that, the reps look more productive.

What I would add on the whole thing, as you see in our statistics, we are virtually 100% business, we're not consumer or we're not SOHO (ph) or whatever.

If you have somebody down at that level you're probably more productive too, because it doesn't take as much care and feeding, they just call in with sales consequently, the rep productivity looks better.

So in some case there's apples and oranges comparison differences there, but I would echo what Tim said.

I think our goal is to increase that productivity.

We've always felt that.

And the good thing that I feel right now is we have an opportunity to look outward and start to accomplish that instead of trying to teach people inward, you know, here's what you're supposed to do.

So I hope to see some improvement.

All right, I appreciate it.

Nice quarter.

Thanks.

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

Please go ahead.

Hi, guys.

Hi, Bruce.

I would like to return to a question that someone had asked earlier that I think you glossed over a little bit.

Can you break out a little bit between SMB and large corporate?

In the quarter?

In terms of what, Bruce?

In terms of general business trend in the quarter.

You know, we just have it aggregated together so if you can give us some sense -

Absolutely.

In terms of the general trend, SMB to corporate, were definitely up for the quarter.

The public service was down, but that, you know, kind of to be expected because of the fourth quarter.

We definitely saw an upward trend in both of those segments during the fourth quarter.

Corporate was slightly stronger than SMB.

And I think and that's a good comment.

Corporate was probably stronger than SMB and I believe we said that earlier.

But not a huge number where you'd go oh, my God there's a big difference there.

Part of the reason that we're hedging that answer is that so much of the time when you have those accounts that are on the edge, in that you know thousand sixty (ph) you call that a large corporate you call it underneath you know if it's got 50 buying locations and no central, how do you call that so.

This is more of a general trending as opposed to a definitive answer.

OK.

Can you talk about pricing as specific as you give it by category you know CDW has give us some data that indicated that, that had at least stabilized and certain categories actually come up a little bit.

Have you seen that as well?

Well, I think overall Bruce is that is - the good news on the past 12 months is we've had pretty good pricing discipline, obviously so has CDW, et cetera, so as I sit and look at it right now, I feel pretty good about the just the overall margins in general.

Additionally, we started to see some shortages, whether it's obviously flat panels and the glass on the notebooks, et cetera, that's one of the reasons why our backlog is up right now, from what it was historically after January.

So I think it's one of those things wherein general any time when you start to have product shortages even though they're small in the big picture, those help gross margins, not hurt.

But overall, I've actually, you know from my perspective, I've seen a pretty stable pricing environment out there.

We haven't seen anything unnatural happen in a long time.

So that's good news.

When you talk about backlog and you mentioned that earlier; is that a figure that you have a specific quantitative measure on, and if so, do you want to share us the backlog went from this to that or is just kind of a feeling that customer order flow is more backed up than it typically is?

We have the exact number and it is substantially up but it's one of those things where we don't want to get into you know trying to report that on a monthly basis or whatever, because sometimes it can be misleading.

Especially from the point of view that it might be a backlog that's ready to ship immediately or might be a back log that's going to roll out over four months.

So we have to give in-depth detail of it, but the back order we're talking about is ready to ship inventory right now, is substantially up.

OK.

Last thing, you talked a little bit about increasing your marketing profile in the year to come, and in the past, Stan, I believe you had actually quantified that and said you know we intend to spend X, maybe $12 to $15 million.

Can you give us any kind of quantification of that?

How much did you spend in marketing dollars in '03 and how much do you intend to in '04, thanks.

Well, just overall marketing budget in Q4 is approximately 2 million.

OK.

We'd like to increase that by roughly the same number.

It will take us a couple of quarters, hopefully less, with how things work to get there.

But we would like to again go out with traditional branding, traditional vehicles but also really focus most on the demand generation side.

How do we not just brand Insight but how to do we actually get customers in the door-buying product now, as an example?

So, it will be a combination of both.

And again, next to our competitors it's not a huge number, but it is a huge number compared to what it was, let's say, six quarters ago when it was you know 500,000 was the entire marketing department budget.

So, you know, we've increased it substantially, and we would like to increase above and beyond that based upon, again, if we see sales increase, cost decreases, you know we may go above that, take a portion of the savings on those increases and net income or net operating income from increasing sales, put those towards the marketing and the branding side of our business.

Hope that gives you an idea.

Yeah, did you see 2 million in the quarter and you would hope to increase another couple million?

Yes, that was a quarter.

Yes.

OK.

Thanks.

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

Please go ahead.

Hi, good afternoon.

How are you doing?

All right.

I was wondering, in terms of the since the number of selling days that we'll see in the first quarter or effective selling days, should be higher and assuming that there is strong trend continues, is there any reason that we should believe first quarter sales wouldn't be equal to or greater than fourth quarter?

Are you looking for to us forecast revenues, is that what you're trying to have us do?

(inaudible) and Yes.

But -- Ship days is a key metric in the sales number, there's no doubt.

Obviously, how Christmas falls, how New Year's falls, how holidays falls, all those in impacting the sales but you know one of the most important is number of ship days.

OK, that's as close as I guess I'm going to get anyway.

Could you talk about contribution margins?

You mentioned a couple of times that based on the amount of incremental EBITDA margin you have to spend, you're going to spend some of that on marketing and some of these other programs.

Could you talk about your expectations as you go forward, I mean are we talking about your spending 10 cents of every incremental dollar or is it a greater number than that?

How are you thinking about it?

This is Tim.

And Stan and I are arguing over who is going to answer this.

I think it's one of those things where it all depends, and I hate to have that wishy-washy answer because is your extra buck at two and a grand or 3 million?

There's a different answer along the way.

And if it were a bigger number, it would probably be half.

If it were a smaller number, it would probably be less.

So this is one of those things where we really got to get a sense of what ends up happening before we do that.

What's Stan's answer?

What I was going to say, Dave, again, we're going to be mindful of the bottom line.

Unfortunately, in this environment, when you're a public company you have to look at that.

And having said that, we're going to do what's right for the business, so I think Tim, in his representation, is absolutely fair, we're going to take a portion and invest in these activities because we think that will help long-term.

And the reason we mentioned all that is because we want to you take that into account as you're doing right now in your modeling.

Because depending -- we have given you a pretty good guidance if you would, or at least outline from the expense side, things that we expect to change.

And from the top line, which you tried to get out of Tim, which I was very proud of him with his answer, you know, that's something that is variable, where it can be on a bunch of things.

But if you do think there's going to be an uptick in that revenue, then be conscious of the fact that we'll probably take a portion of that and invest it in the business going forward.

Got it, OK.

And then, just final question on the other expense line.

As far as what should be in there going forward, you had some noise this quarter, but going forward, that should be a pretty small number, probably going to zero, I would guess, and then a related question is when does the share repurchase start in?

Well, first of all, on your first question.

Explain that again, Dave, I'm sorry, I don't understand what you're looking for

I'm just thinking about the other expense item.

There were a lot of moving parts this quarter and if you're thinking about that just purely in terms of interest expense and other items that number should be close to zero, given your net virtually net zero debt position, correct?

No, we do have debt outstanding on the balance sheet as of 12/31, which is $65 million.

So, I think that there will be interest expense with that, you're absolutely right there are some strange things in that line, but we've identified those for you.

Which leads to your second one on share buyback, which we've continually said we want to get the debt down to zero before we start thinking about that particular thing, and weighing whether that's the right thing to do and since we still have debt outstanding we haven't come to that point.

One reason you might have why has debt increased, as we said earlier, we paid off some mortgages.

When we were converting from the Chicago cargo basis down to our Tempe and moving the accounting from there down to here we stretched payables longer and that was resulting in Q3, which they came back to a more level, normal level in Q4, and inventory increased.

So all of those things caused our debt to go up and as I told a lot of people, in some ways, I kind of hope debt goes up because your funding receivable grows.

So, if sales increase, hopefully our debt will go up.

So I guess what I'm saying is that I've dodged or I'm coming to your question in another quarter development and we're going to repurchase because we haven't brought the debt back to zero yet.

Does that help?

Sure, Stan, thank you.

Your next question comes from the line of David Small with Goldman Sachs.

Please go ahead.

Hi, guys.

Just a few questions.

Stan, maybe the first one, in terms of the inventory buildup, do you expect that you'll, your next quarter have inventory, is this level of inventory where you would like to be longer term?

And maybe give us a little more color on why you actually did some of these purchases this quarter.

And then, also on the expense side, do you think you can get any vendor funding to cover some of these increased marketing expenses?

This is Tim.

I know you directed it to Stan, but I have to jump in on a couple of these.

All right.

Number one, is because those two are tied together, part of it is that what we're seeing is some of the suppliers are specifically incentivizing us to buy direct versus through the channel, so that's being protected in etc., (inaudible).

So, because of that, you've seen our drop-ship percentage come down.

So over time based upon the economics, we will ship more out of our own warehouse, and so that could be -- why you're going to see inventory go up and potentially accounts payable go up with it.

So, depending upon how that ends up working out from that perspective.

So, over time, I would forecast or at least guess that our inventory and our amount, our inventory will go up and our amount of drop-ships will go down.

So, we will actually end up holding more inventory, not less inventory, especially since we're on the common system right now and they (inaudible) aggregate purchase is much easier now than it was but the recent plan is strictly economic.

We want to increase the, obviously, the gross margin by doing that.

We may have a slight increase in inventory provisions etc., or obsolescences but that would obviously, be more than offset by the gross margin increase.

This also really goes into our second question, which is supplier dollars.

It's one of those things where if you're buying it through somebody else, it's not merely as impact full for certain suppliers as if you are buying it direct.

We would hope that would increase our supplier dollars and as we do more marketing, we're really going to have to prime and pump ourselves with some of those dollars.

But over time, I would hope that a big chunk of those are going to be offset by suppliers.

So, you may see a blip up in some of the marketing expenditures but over time, I would hope that we would have a large percentage of that covered by the manufacturers as we're doing that.

So that's really a short and long-term thing why it's a little bit tied together there

OK and then just funds on the revenue side.

The DAC performance guarantee was that there in '03 and is that something you can earn again in '04?

And then just finally, you know, one of the, just had this idea of revenue growth, it is one of your goals in '04, to grow the business.

You know, what would you, what are you gunning for?

What would make you happy?

Our number one on DAC, I don't know about all contracts but, most contracts have some sort of fee structure in there.

Min, max, guarantees, not guarantees, etc., so it's one of those things where it's difficult to forecast what will or will not come through in contracts or overall as a business until we actually get there.

So, you can't really plan for or against those things to come in on a regular basis.

And Dave, this is Stan.

It was not there, I think, you meant in '02.

It was there in '03 but it was not there in '02

Exactly, thanks.

And then, just in terms of overall revenue growth, is there a particular target that you have?

There really isn't.

Tony has gone, you're talking DAC, is that correct?

Just overall, I mean, one of your goals for Insight for '04 you said was just to grow the business.

Do you have a particular target in mind?

We certainly do internally but that's again, we don't give any of the guidance on that, David

Great.

Your final question comes from the line of Bruce Simpson with William Blair.

Please go ahead.

Hey, Stan, just a follow up on cash flow.

It looks like it was on an operating basis, $60 million in the year, that's down a little bit from 75 in '02 and probably most of that is changes in working capital.

But I wonder, if you could just kind of run over for us whether you think that, that is kind of a standardized level that makes sense for the current net income, or if there's anything in '03 that boosted that higher or lower than you would have liked to see in it and should we be looking at CAPEX kind of in the 20 to $25 million range as we saw it this year?

OK.

First of all, let me do the second one.

CAPEX will probably be in the range of 15 to 20 million instead of 25.

You're absolutely right in terms of cash flow, was 60 million for the year, which is down a little bit, compared to 2002.

One of the reasons that it was down, or one of the factors that are affecting this is remember that there was probably more depreciation taken this year due to the accelerated depreciation on the IS system than, there will be in the other.

And then, you pointed it out, it's very difficult in some senses to predict where inventory is going to go.

Tim has kind of indicated we expect longer term that it's going to continue to increase, which will certainly have a negative effect on that, and then a lot of it also depends on receivable, where that's going to be, because in 2003 we had a challenging year.

Hopefully, things will change in 2004.

If so, instead of the receivables liquidating and going down, we're going to have an increase there, which, the cash provided.

So, does that help kind of give you some things to draw on?

Yeah, I mean that helps on kind of a incremental basis year over year.

I guess, what I'm trying to get at is, what should be your standard relationship versus your net income?

I mean, do you think 60 against your net income year is fair or was this year unusual because of changes in working capital?

Yeah, and I guess here I'm going to be kind of throw it back on you.

A lot of it depends on how you're modeling.

Certainly, the sales growth will affect that, which increases revenue, which depends on your DSOs.

If you remember, our DSOs are in the mid 40s.

I personally think that eventually we can get that down a little bit better than what ear doing now, maybe 2 or 3 more days.

But that's going to take some focused effort but I think we can do that.

So that will affect one of your results of this.

The other is the inventories, we've kind of given you our feeling, we expect those to go up slightly.

I don't think they're going up dramatically, 50% but I think it would go up a little bit for the reasons Tim gave you earlier.

So, I think it goes back to how you're modeling and the two big drivers are inventory receivables and sales and we've told you what we think in those areas.

Thanks, Stan.

On behalf of Insight Enterprises, thank you for all of your support.

To all Insight employees around the world, thank you to your hard work and dedication.

Over the past two years you've rolled up your sleeves and made it happen.

I believe the integration of the company and upgrade to Maximus is one of the greatest feats this company has happened.

I'm humbled and arbitration and magnitude complexity and the minimal loss sales and profits of this large product.

I'm proud to be your CEO and I appreciate the opportunity to lead the company to the next level of success.

I am confident that together, we will make good things happen for our employees, customers and stockholders.

We have an exciting year ahead of us, IT budgets appear to be finally opening up, and we have a tremendous value to offer our customers.

Let's make the most of our opportunities before us and work together to make 2004 an outstanding year.

Thank you.