Insight Enterprises Inc (NSIT) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your quarter 2, 2004, Insight Enterprises earnings conference call.

At this time, all lines are in listen-only mode and towards the end of the conference call, we will be taking questions.

If at any time, you need operator assistance, please key 0 0 and an operator will be happy to assist you.

At this time, I will turn the call over to your host, Mr. Stan Laybourne.

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 June 30, 2004.

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

Tim is traveling out of town today and dialing in remotely, so we apologize for any technical difficulties we may encounter during the call.

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 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 from our conference call participants.

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

An archived indexed copy of the conference 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 containing time-sensitive information that is accurate only as of today, July 22, 2004.

This call is the property of Insight Enterprises, Inc., and 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 and non-GAAP measures discussed on the 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 form 10Q for the quarter ended March 31, 2004.

As required by SEC rules, we have provided a reconciliation of non-GAAP measures to GAAP in our earnings release and 8K filing and you can find those documents on our investor relations section of our website.

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.

I am pleased to report today that Insight Enterprises posted net sales growth of 6% year over year and 5% sequentially, as a result of our efforts to move beyond the success of our internal initiatives and focus more on our efforts and the customer.

Earnings per share of $0.28, excluding net increases to income tax expense for adjustments to deferred taxes, was equal to last quarter and represents a 47% increase over Q2, 2003, earnings per share of $0.19, excluding the effect of last year's restructuring expenses.

I will be providing a brief overview of second-quarter 2004 performance trends and news for each of the operating segments.

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

Let's start with Insight North America.

Although we have successfully completed many internal initiatives, Q2 was the first quarter in two years that a much greater emphasis was placed on the customer.

The system conversion is behind us, the internal initiatives are now focused on ways to deliver technology solutions to business customers more effectively and efficiently.

We are designing and implementing enhancements to our system, website and, as such, to increase our customers' ease of doing business with Insight, enhance the productivity of account executives and automate manual processes in both the sales and support functions.

In Q2, we saw a sequential sales increase in net sales from each of our customer divisions.

Q1 is typically a seasonally weaker quarter for sales to large corporate customers and, as a result, both the large corporate and public sector divisions had a much stronger sequential growth than the SMB [ph] division did in Q2.

So far, July sales are up 9% over July 2003, and we are seeing all of our customers' divisions, customer sales divisions contributing to that growth.

I continue to be encouraged by the demand for IT solutions and our ability to effectively compete for opportunities.

As we discussed last quarter, we are making investments now to support anticipated future growth.

In Q2, part of these investments, including adding a total of 106 net new account executives, 57 of those in North America, and 49 in the UK.

Last quarter we stated that we plan to add in North America and the UK a combined average 50 to 100 net account executives per quarter.

We currently expect to add net account executives in the UK throughout 2004.

In North America, in Q3 and Q4 of this year we may not add net account executives but rather focus on productivity and training of the account executives that we already have on staff.

We increased the marketing expenditures in Q2 as we discussed last quarter and expect that our quarterly marketing expenditures will now remain fairly stable for the rest of 2004.

As we have previously stated, our goal is to obtain vendor participation for most of our marketing initiatives.

However, until we show that our increased market initiatives are resulting in sustained topline growth, most of our additional marketing expenditures will not be funded with incremental dollars from suppliers.

These marketing initiatives are imperative, however, not only to generate demand and increased band awareness, but also to protect our existing supplier funds as vendors are shifting their funding from metrics based on sales to cooperative marketing requirements.

Insight UK completed its sixth consecutive quarter of operating profitability and posted year-over-year growth in net sales of 16% and earnings from operations of 231%.

The second quarter is seasonally a weaker quarter for Insight UK due to a strong Q1 for large corporate and public sector customers.

As such, Insight UK posted sequential declines in net sales of 13% and earnings from operations of 33%, excluding the effect last quarter of reductions in liabilities assumed in previous acquisitions.

Q1 was a tough comparison, and May and June net sales were slightly lighter than we had expected.

Nonetheless, Insight UK continues to perform well and, so far in July, Insight UK’s net sales in British pound sterling are up 4% over July 2003.

This brings me to Direct Alliance which saw a slight decline in net sales this quarter compared to last quarter due to a reduction in direct expenses reimbursed by clients.

Gross profit remained flat at 4.8 million.

We are pleased to announce that Direct Alliance signed a well-known new client from the technology sector during the quarter.

The program for this new client is scheduled to start in Q3, and although it will take some time for the program to ramp up, as is the case for all new programs, we are excited about the opportunities that this new client brings to Direct Alliance.

We recently announced the successful IPO of PlusNet.

Although PlusNet continues to have strong performance, being an Internet service provider is not core to our business and has been our goal for some time to maximize shareholder volume by divesting PlusNet when the market was right.

As a result of the IPO, we currently own approximately 45% of PlusNet and, as Stan will discuss in more details in a few minutes, we will continue to include 45% of PlusNet's results of operations in our financial statements until we sell additional shares and our ownership is reduced to less than 20%.

To touch briefly on the CEO search, the process is continuing.

The search firm has provided its initial list of candidates for the board to interview and we are now engaged in the interviewing process.

We still expect that the search could take until the end of the year, and certainly do not want to rush this important decision.

During the process, please respect that we will not disclose information about any of the candidates.

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

Stan?

Thanks, Tim.

Since substantial detail on 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, we are very pleased to report net sales growth of 9% sequentially over last quarter for Insight North America.

It has been a long couple of years but the investments and acquisition integrations and system conversions are beginning to pay off.

As we have stated before, we expect to grow sales at least as fast as the market.

The number of account executives increased by 57 from last quarter to 1,252 and, as Tim stated, we believe that net additions for the remainder of 2004 will not be necessary, given internal initiatives to increase account executive productivity.

Average tenure of our North American account executives is down slightly from 3.2 years last quarter to 3.1 years, with 33% of the account executives having less than one year experience, 12% with one to two, 9% with two to three, and 46% with more than three years experience.

The slight decline in average tenure is primarily due to the net additions during the quarter.

Gross margin decreased this quarter to 11.4% from 11.8%, due primarily to an increase in the percentage sales to large corporate and public sector customers, which are at lower product gross margins and continued pricing pressures from competitors.

Offsetting a large portion of the overall product margin decrease, due to customer mix, was an increase in gross margin of approximately 40 basis points due to a surge in referral fees from Microsoft for enterprise agreements renewals during the quarter.

The increase in sales of Microsoft enterprise agreements was due primarily to the renewal of two-year agreements and incentives by Microsoft to encourage customers with contracts renewing over the next few months to renew in June.

Other components of gross margin remained relatively stable from last quarter.

We expect gross margin to be down sequentially in Q3 due to the expected decline in referral fees for Microsoft enterprise agreements.

Selling and administrative expenses as a percentage of net sales decreased sequentially to 8.9% from 9.5%.

The decrease is due to the increase in net sales and a focus on cost controls in noninvestment areas, offset by planned increases in net account executive additions and marketing expenditures.

Long term, it is still our goal to reduce our consolidated selling and administrative expenses to between 7.5 and 8.5%, and I continue to believe our goal to reduce our selling and administrative expenses to 8.5% for Insight North America by the end of 2004 will be achieved.

Of course, to achieve these target percentages we will need to increase net sales, realize additional operating efficiencies, implement additional cost cutting initiatives or achieve a combination of the three.

Net sales this quarter for Insight UK decreased 13% sequentially to 105 million from 120 million in Q1 2004.

With decreases in the British pound sterling exchange rates from last quarter, accounting for 1.9 million of the decrease, excluding the effect of fluctuations in the exchange rates, net sales decreased approximately 11% sequentially, as the first quarter is seasonally the strongest quarter for the UK business, due to March fiscal year ends for many large corporate and public sector customers.

Additionally, Q2 had three fewer shipping days than Q1.

Insight UK added a net of 49 account executives during the quarter to support anticipated growth.

Our plan in 2004 is to continue to add approximately 15 to 25 account executives net in the UK each quarter for the rest of 2004.

Despite the net additions this quarter, average tenure of our UK account executives remains stable from last quarter at two years, with 55% of the account executives having less than one year experience, 16% with one to two years, 6% with two to three years, and 23% with more than three years experience.

Gross margin increased this quarter to 14.5% from 13.9% in Q1, due primarily to an increase of approximately 25 basis points contributed by sales of Microsoft enterprise agreements during the quarter, which are recorded as net revenue and 100% gross margin, and an increase in supplier discounts and supplier reimbursements as a percentage of net sales.

These increases were offset partially by an increase in the inventories provision.

We expect to see a slight sequential decrease in gross margin in Q3 due to an expected decline in referral fees for Microsoft enterprise agreements.

Selling and administrative expenses as a percentage of net sales increased sequentially to 12.3% from 11%, due primarily to the seasonal decrease in net sales, the personnel and training costs associated with the net account executive additions and an increase in bad debt expense.

We expect selling and administrative expenses as a percentage of net sales to decline as net sales increase.

Insight UK continues to contribute positive earnings from operations.

Although they posted a seasonal, sequentially decrease of 33%, excluding the effect last quarter of reductions in liabilities assumed in a previous acquisition, earnings from operations this quarter increased an impressive 231% over Q2 of last year.

Direct Alliance posted net sales of 17.4 million, down 7% from 18.7 million last quarter.

The decrease was due to a reduction in direct expenses reimbursed by clients.

For the three months ended June 30, 2004, Direct Alliance's largest outsourcing client accounted for approximately 61% of Direct Alliance's net sales, and the top three clients represented 90% of net sales.

Direct Alliance's gross profit remained flat at $4.8 million compared to the first quarter of 2004, despite the decline in net sales.

Selling and administrative expenses at Direct Alliance increased to 1.7 million for the second quarter of 2004 compared to 1.5 million last quarter, due primarily to an increase in bad debt expense.

Direct Alliance posted earnings from operations of $3.1 million for the first quarter of 2004, a 4% decrease compared to earnings from operations of $3.3 million last quarter due to the increase in selling and administrative expenses.

As we announced earlier this month, we successfully completed the initial public offering of PlusNet on Aim, a market of the London stock exchange.

PlusNet began trading under the symbol PNT on July 14, 2004, and the public offering price was approximately $1.67 per share.

Insight Enterprises sold 11.1 million shares which resulted in gross proceeds to us of approximately $18.6 million.

PlusNet's market value, based on the public offering price, was approximately $46.7 million, compared to the approximately 16.9 million that we paid for PlusNet.

The sale of shares in the offering reduced our ownership of PlusNet to approximately 45% and, as such, the investment in PlusNet starting in Q3 2004, will be accounted for under the equity method until our ownership is reduced to less than 20%.

This means that starting in Q3 2004, 45% of PlusNet's net earnings or losses will be recorded in our consolidated financial statements as nonoperating income or expense.

We will record a gain in Q3 2004 on the sale of the shares owned by Insight Enterprises, Inc., of approximately $6.2 million.

Additionally, we will record bonus expenses of approximately $830,000, related to a management incentive plan with the top executives of PlusNet that compensated them, as a group, approximately 12.5% of the gain after certain adjustments related to sales in the IPO, as well as future sales of PlusNet shares owned by Insight Enterprises.

This plan provides further incentive to the PlusNet executives to continue to maximize the value of PlusNet.

Because we announced the IPO PlusNet in June, we were required under United States GAAP to book tax expense and a deferred tax liability in Q2 of approximately $2.1 million representing the future tax liability on the difference between the book and tax basis of PlusNet at June 30, 2004.

Included in nonoperating expense for the quarter ended June 30, 2004, is 131,000 of investment in net loss of an equity method investee.

This relates to the mentor protege relationship with executive technology that we announced last week.

As part of the relationship, we invested $400,000 in executive technology for a 20% equity interest and provided guaranties to certain customers and suppliers of executive technology while it builds its business.

This investment is recorded under the equity method of accounts and, as such, 20% of the quarterly losses of this start-up company are included in our nonoperating expenses.

As you saw in the earnings release, we had a couple of unusual entries to income taxes during the quarter that combined increased tax expense by $853,000 and decreased diluted earnings per share by approximately $0.2.

We recorded $2.1 million of deferred tax expense related to PlusNet that I described earlier and $1.3 million of tax benefit for the release of valuation allowance primarily related to the utilization of depreciation allowance carry forwards in the United Kingdom.

Cash flow from operations were negative this quarter, due to the sequential increase in net sales and corresponding increases in accounts receivable and timing of payments on accounts payable and accrued expenses.

The outstanding balance under our line of credit and accounts receivable securitization facility increased to 65 million at June 30, 2004, from 8 million at March 31, 2004, although we also had approximately 61 million in cash and cash equivalent at June 30th.

In July, we received net proceeds from the sale of PlusNet shares of approximately $16.8 million after expenses and management bonuses, of which approximately 8.9 million can be brought back to the United States without being subject to additional taxes.

We currently intend to pay down existing debt and/or leave these funds invested in the United Kingdom.

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

Tim?

Thanks, Stan.

I am pleased with the results of the quarter and the initiatives we are implementing to grow market share, increase account executive productivity, and create efficiencies throughout all departments in the organization.

These are short and long-term initiatives that will position each of the operating segments to operate more efficiently and allow for everyone to stay focused on the customer.

We believe we have created a structure for success and I am excited about the opportunities that lie ahead.

That concludes Stan and my comments.

We are now available to answer any questions that you might have.

Thank you, sir.

Ladies and gentlemen, at this point in the conference call, if you would like to ask a question, please key star 1 on your touch-tone phone.

If you'd like to withdraw a question, please key star 2.

Questions will be taken in the order they are received by.

We'll take our first question from Mr. Matt Sheerin of Thomas Weisel Partners.

Thank you.

If you could just talk a little bit about the sales trends during the quarter -- I know you updated us at your analyst day about trends in April and May.

CDW had mentioned that they saw a bit of softness in early June and then things bounced back in late June and into July.

Did you see similar trends or could you share that with us?

Stan?

Sure, Matt, I'll be glad to.

First of all, I did hear that on CDW's call.

We certainly didn't see any slowdown in June.

In fact, we saw a little pickup from May.

Now, I'm talking Insight North America when I talk about this, by the way.

April started out well.

May was a tad bit slower and then June we saw a pickup and that's in Insight North America.

Now, in the UK, we saw a slightly different scenario over there.

We saw a very good beginning and then we were a little disappointed with the sales that came through in the May-June time frame, given how it started out.

So, I guess in sum, Matt, you know, we didn't see the sales slow down.

Certainly in Insight North America that was indicated by CDW and, as was mentioned earlier, right now we're looking at 9%.

Although this is only the first 15 or so ship days, you know, in the month of July, it's 9% up year over year.

That may not be representative of the quarter, but it is certainly a good indication, we think, that things are still positive out there.

Is that both on the large corporate side and the SMB?

Yes.

Again, Matt, let me back up, because this will be a question that I'm sure people will keep trying to address.

Sometimes it is blurry to distinguish between the two.

We tried to give you an indication in the conference call that really we thought the corporate and the large customer and the public was a little bit stronger in Q2 than SMB; but, again, some of that is a little blurry and fuzzy to define exactly.

Having said that, when I do talk about July and the upset we are seeing, we are seeing it across all segments; so, it is not just in corporate, it's not just in SMB.

It's really a good barometer across all segments.

Okay, great.

And, regarding gross margin, you talked about the Microsoft benefit and some of that going away.

Could you give us a range that we should be looking at or you should be expecting for gross margin over the next couple of quarters?

As we said in the conference call --Tim, I'll jump in on that if that's okay.

Sure.

As we said in the conference call script, we expect it to be slightly down, okay?

Now, you know, every quarter it seems like there is something -- it just fluctuates around a little bit.

This time, we thought we'd point out the enterprise agreements that are there.

Certainly, we've got, you know, we expect to have some next quarter, probably not at the volume that we did this past quarter because of some incentives that were given by Microsoft to get it done by June 30th, but there'll certainly be some there.

We may not see as much competitive pricing pressure next quarter as we did this quarter.

You really don't know, and that's why we are really planning internally just for a very slight decrease in gross profit margins.

Hopefully, that helps.

That's great.

Thank you.

You bet.

And our next question comes from Mr. David Small of Goldman Sachs.

Please go ahead.

Good afternoon.

A few questions.

The first thing is: What stops you guys now as you look forward from [inaudible] to think about returning value shareholders either in the form of a dividend or a share repurchase?

I mean, you basically are almost in a net cash position.

And then -- I'll just read these questions and you can address them.

And in terms of -- I guess if tech spending, if you are more comfortable in a tech spending environment, I guess it is understandable you would want to improve productivity, but wouldn't this be the time as well to add more salespeople?

So, I guess, could you give us a little more color on that issue?

And, then, in terms of the advertising budget, could you just explain, is that similar to what you were describing last quarter in terms of how much you were going to spend and when do you think you could start to get vendors to pay for that?

Thanks.

Stan, why don't you take one and three, and I'll take number two after you finish.

Okay.

First of all, your question about using some of our cash to possibly retire stock. or whatever -- we have continually said, as I know those who follow the stock have heard over and over, that we do want to retire our debt before we really got into the question of what do we do with excess cash.

As I said earlier, you know, a portion of our cash that we have on the financial statement, unfortunately, it can't be brought back into the U.S. without a repatriation tax on it.

So, consequently, given that we do believe in the UK long term, we think we can use that money to invest over there; so, although there's 60 million on the balance sheet, it doesn't necessarily mean that all of that cash can be used to retire the stock.

Now, having said that, I certainly think that we're at a point now over the next couple of months that the board of directors of Insight Enterprises will start to address the issue that you are bringing up, David, as to what do we do with excess cash and, so, I really can't comment that we'll do one or the other right now, but I do feel comfortable that that will be a topic on the board's agenda over the next couple of months.

Regarding the advertising expenditures, just to refresh for everybody, historically on average, we had been spending about $2 million per quarter on advertising.

We said that we wanted to double that in 2004.

We were up a little bit over that 2 million in Q1.

In this quarter, we actually got up to where we wanted to approximately $4 million in the quarter and, as I said earlier in the conference call script, we kind of expect that to remain constant over the balance of the year at $4 million per quarter.

Tim, do you want to answer the tech spending?

Sure.

Overall, we're feeling more comfortable with the increases in demand out there.

Again, they are not these huge increases that are lifting every single boat out there, but we feel fairly comfortable.

What we have seen since the system conversion happened in January is that we're really starting to dial in the systems, the productivity enhancements and also with the web.

What we're doing right now is really focusing on our internal folks for the next couple of quarters.

That's not to say that we may not add additional account executives, but we don't want to put the number out there that says, for sure, we're going to add 50 or 75 in the U.S. as an example, guaranteed each quarter based upon timing, But we still feel very good about the business and we think we can still see a growth in the business; in fact, I'm personally very comfortable that we are going to grow sequentially and year over year in all segments of the business in Q3, just given our existing staff that we have right now.

We are going to make significant investments on those resources that we are turning new folks -- turn them really internally into our existing sales force for the productivity enhancements and additional training of our existing reps.

So, do not take that as an indication at all that we're worried about demand or that we see demand falling at all.

Tim, let me add one other comment to David's question.

You know, I would also add that I think this is the first quarter that we have really had the full impact of the new system, and I think we're seeing some efficiencies that we're able to garner from this new system, which we were hopeful were going to be there, and as a result of that, I think maybe we can help to enhance the current productivity of our current account execs instead of adding people.

So, I would take that also as a positive from the system point of view that it is leading to further enhancements for us, which is something that we wanted to have happen.

Okay.

Thanks.

Thanks.

We'll take our next question from Mr. David Manthey of Robert W. Baird.

Thanks very much.

I noticed that the average order size increased for you and it did for a couple of your competitors as well.

What I'm trying to understand here, is this a mix issue that because the enterprise base was strong for you that drove that number up?

Is it partially ASPs or is there something else going on there?

I'll jump in, Tim, since it's numbers I'm sure it is me.

Dave, you're absolutely right.

It is a mix issue.

I think we had a very good corporate quarter as we indicated in the conference call script, and as you suggested, our average order size did increase, but it is really a mix issue that's causing that as much as anything.

Okay.

And could you give us a general update on your government initiative, given that we are moving into the federal season here?

Could you talk a little bit about any progress you made?

I know you have a new person heading up that division.

This is Tim.

Obviously, it is going to be a strong quarter of the year for the public sector business, specifically in the federal business.

You know, we feel very good about where we are at in that business, we're gaining traction although, as a percentage of our overall business, it is not a huge number.

So, I don't think it is going to move the needle dramatically for Insight Enterprises positively or negatively; but, overall, we are continuing to see nice progress in that part of our business.

Great.

And then, last question.

On DAQ, when you go in to pitch a deal or an agreement, how do you frame that in terms of is it returns on capital, is it money-saving opportunities?

How do you pitch that and then secondarily, once you get the deal in place, how do you measure success at DAQ?

This is Tim again.

I think part of it is that, with DAQ, literally every deal is a unique deal.

Although we try to follow a rough format, which really says we want to do a cost-plus deal, which is cover our costs; cover, you know, the direct operating costs when the program actually starts, although we may have some additional expenses on top of that.

And, then, going forward, we will get our incentive or our performance fee based upon results; i.e., how big we can scale the program usually determines what kind of return we get.

If you follow the logic that we are using in terms of really doing a cost-plus scenario, the return on assets or return on capital is very, very high, because, in reality, except for the fixed costs that are already in place, we're really not adding a lot of incremental capital to the equation when we start a new program.

So, except for the little ramp-up time there, it's really a very, very high return on capital, especially on an incremental basis.

Does that answer your question?

Yes, it does.

But does the lower client reimbursements you saw this quarter, does that just mean that volumes were lower and, therefore, you were getting more fees, or is there something else happening?

Well, sometimes programs, the actual supplier or the actual customer that we have, or the manufacturer usually, they can choose to say we want you to take 20 people out of the equation; and they may do that, but we may still keep those 20 people on in the business for other programs or other investments.

So, even though they are still on our payroll, we were not getting reimbursed for their particular salaries in that particular quarter.

Okay, great.

Thank you.

Thank you.

And, a reminder, it is star 1 on your touch-tone phone if you would like to ask a question.

We will take our next question from Brian Alexander of Raymond James.

Thanks.

Just a clarification on the gross margins, when you talk about expectations for them to be down slightly just a little bit more color there, is that kind of the traditional 10 basis points, or is it going to be more precipitous than that?

And can you clarify when you say that when you talk about the Microsoft impact being 40 basis points, should we just pull that out and assume that in North America, your gross margins would have been about 11% without that?

First question.

Yes, I think you're right.

I think 10 -- you know, it depends on how you build your model, Brian -- 10 to 20 points depending on how conservative you want to be is probably what we are talking, not more than that.

In terms of the EA agreement, we certainly will have some of those, you know, that will come through in the quarter, maybe not to the volume that we have right now; and, so, I think it would be rather harsh to pull all of it out.

I think probably somewhere, you know, north of all of it is the proper thing to do.

But, as I said, overall, we probably expect just a slight decrease in gross profit -- and, by the way, when we're talking that, I'm really focused on Insight North America, although we did say the same thing basically over in the UK.

Okay?

Yes, I guess just a follow-up.

When you look at the sequential decline, excluding the benefit from the software agreements -- I guess about 80 basis points -- how much of that would you say is mix and how much of that would you say is pricing?

And the reason I ask that is we are seeing sequential increases in gross margin out of your competitors, and I think when we look at the PC information, Dell didn't gain a whole lot of share in the June quarter; so, I'm just trying to understand how much of it is pricing and where is it coming from?

Go ahead, Stan.

Oh no, go ahead, Tim.

That's fine.

Part of it is, is that in any individual quarter, you've got all kinds of issues out there from mixes to rebates, to all kinds of other stuff, to performance gates; so, one quarter up or down may not be indicative of the overall marketplace and what we're going to see this quarter, next quarter and the quarter after that.

I think what you have seen over the last several years is more stability in pricing than anything else.

Hey, every quarter is a shootout there with all of our direct competitors in our space, but also with Dell.

So, I think it is one of those things where it certainly hasn't gotten easier out there, but it certainly hasn't gotten dramatically harder either; so, I am hopeful in the future we can raise our gross margins.

In Q3, we're obviously being very conservative.

We want to make sure that we don't set an expectation out there that we can't meet.

And, Tim, I would add to Brian on that, if you had to summarize it more succinctly or address his question, I think it is primarily mix.

Okay.

And, then, can you just flush out a little bit, Tim, the productivity initiative that you are rolling out that gives you the confidence that you can hit the same type of sales growth targets growing faster than the market with fewer people?

Well, I think one of the things out there -- I'm not saying fewer people.

What I'm saying is that I'm not anticipating to add the 100 account executives that I might have said two quarters ago or a quarter ago, but if you look at our productivity, we've actually been raising it.

Specifically, if you pull the new higher groups out, our productivity has jumped nicely from Q1 to Q2, and I think that some of the enhancements we're doing, some of the features we're doing on the web -- in fact, I’ll touch on that a little bit later but we totally redid and revamped several parts of our website, specifically the search; and our number one thing I think, in my personal opinion, we're the best search in the world right now among computer providers; so, I think if you look at things like that, some of the other things in terms of how we interface the web into our main engine with a SAP, I think that we've got some advantages over other folks out there, in terms of our sophistication level, how we can customize things specifically for some of our customers that require unique things to happen to their website and their purchasing process, whether it is XML, EDI or just web based.

All of these things, together, I think are going to have nice incremental impacts to our productivity over the next several quarters.

Specifically, we have some tremendous initiatives that we are doing over the next couple of quarters, and because of that, we want to focus as much as we can on those customers that require those initiatives; and it is going to be obviously for those individual customers, but also across our entire customer base will be exposed to it.

All of that is going to take time, effort and energy that we'll really need our sales force focused on this side of our business to be able to explain these new enhancements to our customers; hence, while we are taking that training resource and going to apply it towards our existing sales force, as opposed to bringing a person off the street and starting from ground zero.

Brian, I would also add, keep in mind that we just added 57 people in Q2; so, you know, you've got a lot of people there that you are going to be ramping up productivity with in Q3 and Q4.

Okay.

Thanks.

One last just quick question here.

When I look at your product mix in North America on a year-over-year basis, it looks like you had a lot of changes, more than I remember historically.

So, some categories were up a lot, some were down a lot.

Very few were up or down a little.

So, how much of that would you say is just driven by overall market demand versus perhaps some of the marketing initiatives that you have going on internally?

This is Tim.

There is no doubt some of them were specifically driven by initiatives internally.

There are plans in place that we are implementing a little bit in Q2 and really rolling in Q3 and Q4 that are very, very product specific, obviously within the categories, and even subcategories, to try to grow every single category.

I think it's like anything.

You can't do it all at once; so, we're kind of taking category by category, and subcategory in certain areas by subcateogy; but, overall, I don't think that it was a fundamental change in overall demand, I think it was an internal focus issue with us and how aggressive we were being in certain categories, whether it is promotional, pricing, etc., etc., etc.; but, overall, I don't think we saw a dramatic shift, certainly not that level of shift that you saw in percentages year over year.

Thanks a lot.

Thank you.

We will take your next question from John Lawrence of Morgan Keegan.

Good afternoon, guys.

Tim, would you comment a little bit about the -- not to belabor this on the productivity side -- but would you talk about you've always said that you want your salespeople to do more with the tools?

Now that this was the first quarter with the new system, can you talk about that top level salesperson, how much product -- how much is his productivity improved and are they embracing the system and obviously passing it through the chain?

Absolutely.

I mean, literally every two to three weeks, kind of a new rev or new enhancements come out, or new productivity.

You know, some are fixes but the majority are enhancements into the system.

What I ram really looking for is really our top 100 sales reps to really dramatically grow their books of business.

I'm talking, you know, 10, 20, 30, 40% over the next six to eight quarters.

Obviously, I can't say for sure when it is going to happen or even if it is going to happen, but we feel very confident, given what we have seen and given the enhancements, especially when we interface the web into it.

If we can take our unassisted web sales-- and we're going to start getting more flavor on that -- and also what is our assisted web sales, so to speak, because I think we have a different formula than some of our competitors use; but I think that as we really ramp that up and get more and more interaction going over the web or EDI or XML without rep interface, we are going to dramatically increase the productivity, because we will give those reps more time to focus on adding value; and adding value, in my mind, is not typing an order into the system -- it's everything else surrounding it.

So, as we go forward, I feel very good about where we're at from both obviously our backbone system and where our website is at and where it is going and where our road map is at right now.

All of those things. together.

I think are going to be dramatic.

If you look at CW's productivity numbers compared to our productivity numbers, we've got some head room there, you know, if we just equal where CW is at right now.

So, in my mind, this is not a big stretch.

And just remind us again, when does the system get installed in Europe?

We are definitely looking towards the end of '05 to really do the final planning.

It is probably going to be into early '06.

Great.

Thanks a lot.

Thank you.

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